This article demonstrates another slice in the life of a leasing salesperson: a fictitious sales call with a prospect. This could be a face-to-face sales call or a quick phone call to see how the customer is doing, designed to gauge whether the CFO is facing any new problems or embarking on new projects that may spell new business for the lessor.

Mid- and large-ticket leasing salespeople must know more than products and pricing. They must be able to probe and solve customer problems by offering the structure that best serves the customer’s needs. Leasing salespeople also need to understand corporate finance and financial reporting issues concern CFOs — this is complex but important to arrive at the best lease structure.

Here is CFO Chats number 4:

Leasing Salesperson: Good morning, how are things going?

CFO: We just got acquired by a French company, so I have to convert to IFRS GAAP. It means all of my operating leases become finance leases under IFRS 16. I might as well borrow to buy in the future as finance lease accounting is the same as loan accounting, except more complex. Under IFRS 16 there is no such thing as operating leases — all leases are finance leases.

Leasing Salesperson: Good luck with your new parent. I do think you should reconsider your asset finance strategy. It is true that you will lose the two big benefits of operating lease accounting — the level P&L cost and the classification of the lease liability as non-debt, but finance leases are capitalized like operating leases, so they can be structured to be partially off balance sheet. You can still have a finance lease that capitalizes to less than the cost of the asset. This is still very important from a financial reporting point of view.

You also should consider your U.S. tax position before you stop leasing as you can structure a lease in which either you or the lessor are the owner of the asset for U.S. tax purposes. In other words, if, as a U.S. taxpayer, you have a net operating loss, or other negative U.S. tax position, a true lease may still be economically beneficial for U.S. tax purposes.

CFO: Is “partial off-balance sheet” material enough to make me keep leasing?

Leasing Salesperson: It’s up to you, but any time you can get 100% financing and the full use of an asset but only report a smaller amount than its cost on balance sheet, it will improve your return on assets (ROA) and return on invested capital (ROIC). That can be accomplished by leasing under a properly structured lease that capitalizes at less than the cost of the leased asset.  Remember you are how you are perceived, from a financial reporting perspective, and your parent should appreciate the higher reported ROA and ROIC produced by leasing. If your peers all keep leasing you will appear less efficient. If you borrow to buy, the full cost of the asset will appear on your balance sheet and some lenders require a down payment — that seems like a bad combination from a financial reporting perspective.

CFO: I have some upcoming capital needs. Can you give me a few examples of how big the balance sheet benefit is?

Leasing Salesperson: Here are a few commonly leased assets and my best guess of the amount capitalized on balance sheet: IT (90%), auto and truck fleet (29%), large trucks (29% to 85%), corporate jet (59%) and standalone real estate (26%). These are rough estimates since prevailing interest rates and your tax position impact lease pricing, but the savings in terms of a “lighter” balance sheet would be significant if you continue a strategy to lease all assets.

CFO: I did not realize the size of the balance sheet impact.

Leasing Salesperson: I say you should always lease but be strategic about the structure — the lowest capitalized value is best. Also, how you intend to use the asset is important, so you should request purchase and renewal options and other terms so you can best control the asset at lease expiry. Please let me give you quotes for leases of any upcoming asset acquisitions.