Every construction company, as well as business that uses machinery, knows how expensive the machines can be. We have to purchase, maintain, and use these devices, and when a newer model is presented, we have to invest in it again.
Continuously investing in your brand is recommended, however, not every company can afford that. Because of this, we have to consider solutions that are going to help us use the newest equipment, without spending millions per year.
Keep on reading to find out more about these solutions, and to learn what are ROU (right-of-use) assets and how they can benefit your business.
What are they?
The easiest way to explain this is that the ROU asset is the right of the lessee to use that asset over the course of the lease.
This means that if you choose to get a specific machine, and you choose to get a lease for it, you will be able to utilize that technology while the lease is active. The way that this is calculated is the amount of the liability, payments made before the commencement date, the number of direct costs, and out of this sum, the incentives received are deducted.
There are three standards for the lease liability that form the financial obligation for the lessee to make the payments. They include ASC 842, IFRS 16, and GASB 87. All of these are calculated in a separate way, so make sure you understand the calculations, what would be added to the payment, what would be deducted, and which are discount options.
During the time the lessee is using the equipment, they have the right to keep, use, and operate the machinery without becoming their owner. All of the assets have to be returned in a similar condition to the lessor, so, if the equipment gets damaged or malfunctions, the person using it has to make sure that the machine is fixed.
ROU assets can be anything starting from real estate, aircrafts, industry-specific equipment, as well as machinery with a long lifespan. This can include vehicles, devices, as well as office equipment.
Before choosing this option, you need to be aware that you will have no equity over the assets, you will still have financing costs, and you may end up paying more than the market value of the equipment.
Paying more than the market value is pretty rare, and in most cases, you will end up paying less than what you would invest in brand-new machinery, however it may happen.
You would need to renegotiate the terms continuously and you should know that the service giving you the lease, may want to negotiate the initial agreement over and over again during the course of the lease.
What are the benefits?
Choosing the right-of-use assets may sound like a risky move to take for many owners. Working with something that is not our property may be challenging and there are of course a lot of drawbacks that come with the process.
Nevertheless, there are a lot of advantages when you opt for ROU instead of investing in new machinery and equipment over and over again.
The biggest advantage is that you are going to have access to the newest technologies all the time. You will not have to stick with the same equipment for decades just because you chose that model when it was the best on the market.
This gives companies the opportunity to grow and explore new things while giving their customers the best. There are almost no limits to what you can choose to get and if you don’t like a specific machine, you don’t have to stick with it.
When you choose ROU assets, there will be no ownership on your side. The positive in this is that you will not have to pay for repairs or maintenance as long as there are no serious damages. This will decrease drastically the cost of using the equipment and you will not have to spend additional money on it.
By choosing this approach, you will be able to cut a lot of costs and the whole process is much more affordable than buying all of your machinery. This is additionally beneficial for small businesses and companies that are new on the market, and that have not established themselves yet.
You may not have the financial strength to invest in expensive machinery and with this process, you will be able to get the newest models without paying the full price.
An additional way that you’re going to benefit from the process is that the lease can be as long as you needed to be. Most companies choose short-term ROU assets because they want to be able to get the newest models as soon as they hit the market.
With this, you will be able to use the equipment and just return it when you no longer need it. This will additionally reduce the costs when it comes to the investment, maintenance, and selling process when you choose to replace those items.
There are a lot of other benefits that come with this process and even though the experience is different for every business, ultimately, there are far more advantages than disadvantages.
As you can see, with the right-of-use assets, you will be able to grow your brand, save on costs, and use the newest technologies without constantly paying for them. This gives you the option to test out what is the best for your field of work, and if you want to invest in something further down the line, you will know what you’re getting yourself into.
When you are able to test a device for a longer period of time you will know all the benefits and disadvantages that come with it and you will be able to make a well-rounded decision based on experience.
Before making any final decisions, it is best to talk to your financial advisor or with an expert that will help you choose the best way forward depending on your specific case.