Structuring Equipment Financing: Lease Accounting Rules, Bundling Services and Software, UCC and Bankruptcy Treatment

Description

While equipment finance practice evolves continuously, the area was impacted on several fronts in 2018 and 2019. Financial statement preparers for both lessees and lessors have had to identify and resolve the many technical accounting issues associated with the implementation of the new lease accounting standards (Accounting Standards Update No. 2016-02; Topic 842). At the same time, the 2017 tax reform bill had significant implications regarding the core issues about equipment finance.

Lessees need to determine financial reporting and tax objectives in structuring and pricing equipment leases going forward, including factors such as lease duration, control of equipment, lease payments, and purchase options.

The sale of equipment is often bundled with software and services provided by the vendor relating to maintenance and operation. This further complicates the related equipment finance transaction, which must contemplate continued involvement by the vendor and a separate service agreement (or, in some cases, a combined/bundled lease/service agreement) to operate in tandem with the equipment financing.

Several notable court rulings in 2018-19 involve disputes between parties to equipment financing transactions. The issues considered include whether a transaction documented as a lease creates a "true lease" or a UCC security interest; the rights of assignees; waivers of defenses and "hell-or-high water" payment obligations; vicarious liability of a lessor; and lessor's damages remedies. These cases provide valuable insight to counsel in structuring equipment finance transactions.

Listen as our authoritative panel discusses the recent changes and rulings that may affect the structure and enforcement of equipment financing transactions. The panel will also analyze how tax reform has changed the tax treatment of equipment leases, and will highlight certain equipment finance/emerging tech-related issues under consideration for related revisions to the UCC or its official comments, including bundled transactions and electronic chattel paper.