Honestly, there isn’t a crystal ball that big. But there are certainly questions you should be asking. The Equipment Lease and Finance Association (ELFA) has several marvelous articles and webinars (web-based seminars) that prompted me to start wondering where all this will lead.

Essentially, the Federal Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are sunsetting FAS 13 and IAS 17, the U.S. and European regulations dealing with risk and reward lease accounting. There are two main possibilities for replacement, and the most likely candidate is the “New Approach,” aka the “Asset and Liability Approach,” aka the “Right to Use Approach.” Another, less likely, possibility is the “Whole Asset Approach.”

Under the old rules, one of the main benefits to leasing a helicopter was to keep it off the balance sheet. This let the bank own the helicopter so the operator could simply pay for its use. If you have a public corporation, this let you control the stockholders’ perception of the company (although the leases do have to be disclosed). If you have a small company, it let you control the outrageous ballooning effect of doubling or tripling your corporate assets and liabilities when buying one or two helicopters for your operation. So for your CFOs, “off balance sheet” is a good thing.

Under the Right to Use approach, pretty much all leases will have to be capitalized…no more off-balance-sheet assets. If you were leasing a helicopter from the bank under this approach, you would have to book the Present Value (a value discounted from the total of the payments over the term of the lease) as an asset on your books, and an equal amount (the obligation to pay) as a liability on your books.

Your banker also has to book a value for this helicopter. He will book the residual value of the helicopter as his asset (or possibly not, depending on the interpretation under consideration).

There’s one particularly odd thing under the Right to Use approach. Suddenly the asset is no longer the asset. Instead, the Right to Use the asset becomes the asset, and what used to be called the “asset” is now to be called the “item.” The “item” itself (the helicopter) is considered a “non-financial asset,” and doesn’t get booked anywhere.

This ought to concern helicopter operators in two ways: First, off-balance-sheet assets will be a thing of the past. Whether you own or lease your helicopter, it’s now going to be on your books for all to see. Second, this will likely change the structure of your deals. In addition to a current Fair Market Value analysis, your banker is going to need a residual value analysis. As an industry which consumes leases, we are going to need to think ahead to what the banks and equipment lessors are going to need and want under a Right to Use structure.

The “Whole Asset Approach,” in contrast, would have you as lessee record the leased asset’s Fair Value (not an appraised Fair Market Value, but the FASB-defined version) as the asset, and the Present Value of the rental stream plus the obligation to return the asset as the liability. This approach is unlikely to succeed FAS 13 since it is recognized as a likely cause of death to the leasing industry (if you have to record the full value of the asset anyway, why not own instead of lease?)

It’s way too early for answers yet…but we do need to know that there are questions and that we will have to address them. The HAI needs to keep an eye on this issue, both at the member level and at the governance level. Within a year there will be exposure drafts of the New Approach circulating, and it behooves us to keep an eye on them, and offer professional comments when and if we are allowed to do so.

For additional details, ELFA has written several good articles on this topic, well worth reviewing: “What Will Lease Accounting Look Like in 2009?” in the January 2007 issue of ELT, The Magazine of Equipment Leasing and Finance; “Lease Accounting Project Gets Underway” in the April 2007 issue of ELT; and the March webinar, “Changes in Lease Accounting - No Longer IF, It's WHEN.”

Sharon Desfor became involved in the helicopter industry in 1984, and has been employed by HeliValue$ since 1990 both as editor of The Official Helicopter Blue Book® and as an appraiser. She served 15 years as a Director on the board of the Helicopter Foundation International, including two years as Chair and five as Treasurer. Ms. Desfor currently serves as Vice Chair of the Leasing and Financing Subcommittee of the Helicopter Association International. She is currently an Accredited Senior Appraiser in good standing with the American Society of Appraisers. She and her husband, Barry (HeliValue$’ Founder and Managing Director), often give seminars on helicopter values to bankers and lessors, and in fact have just returned from presenting their helicopter valuation expertise to the American Society of Appraisers International Conference in Hollywood, CA.