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Accounting for the New Normal in Heavy Equipment Valuations

GAAP Accounting Changes – A New Normal

You may be aware of new accounting rules that, beginning in fiscal year 2019, require you to drastically transform how to account for leased and owned assets. Under the revised standards (which were first announced in 2016), operating leases of 12 months or more will need to be reflected on the balance sheet as both assets and liabilities. Leases in general will now need to be recorded as “right-of-use assets” and recorded as liabilities on the balance sheet. The benefit of these changes is high visibility to investors and stakeholders, providing a more transparent view of your financial health. However, for equipment managers, members of the leasing and finance community, and accounting professionals within these organizations, things can get complicated. Prior to these changes, heavy equipment on standard leases which were not capitalized (no intent to purchase after term) were not required for the balance sheet. If your organization leases equipment, this change likely adds far more debt to your balance sheet than under previous lease standards.

Deloitte noted in a recent report that the standards will apply to all property, plant, and equipment (PP&E) items. For rental firms and contractors, this means that the decision to rent or use owned becomes more impactful. For dealers, the shift to the rental market can be a boon for creating additional revenue streams and developing longer-term client relationships through maintenance and renewal cycles.

Tangible and owned assets can be characterized by book value, adjusted book value, and liquidated value. Of these, liquidated value generally confers the lowest value of the assets, which can be helpful in the case where assets must be recorded as liabilities. For equipment owners, this means that accurately estimating the forced liquidation value (FLV) of equipment is important to ensure effective decision-making.  Owned assets that have a useful life of more than one year must also be reported as a capital expenditure (CapEx) on the balance sheet.

 

Data is the Star of the Show

In this “new normal,” accurate equipment valuations will be the critical element that determines whether equipment owners comply or are left behind. To reduce the complexity of reviewing lease inventories, and thus understanding which leases should definitively be included on the balance sheet, companies must seamlessly manage large amounts of data regarding their ownership of equipment, determine which leases are impacted, and how payment is transferred to lessors. In a period of declining resale and residual values for heavy equipment, a persistent and clear analysis must be made to ensure that your equipment is being accounted for properly. It is therefore essential to make your fleet reporting and management as simple and hassle-free as possible.

Fleet valuation and monitoring has many advantages in this new landscape, including asset lifecycle monitoring and simplified accounting. Regardless of whether you rent or own heavy equipment, maintaining robust data on your fleet can allow you to replace equipment cost-effectively, and make more informed decisions on how to report your equipment under the new GAAP rules.

EquipmentWatch can provide objective, accurate, and unbiased current market values and residual values for every asset in your fleet. Age, condition, location, and utilization are all factored in to ensure the most accurate pricing data possible. Learn more.

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Keith Tyson
Brand Marketing, EquipmentWatch
keith.tyson@informa.com