The Proper Level of Trade

It is not unusual for equipment sold at one auction to show up at another auction months later. Competing in the current oil patch environment are original equipment manufacturers selling excess new inventory for approximately what was sold used in an arm's length transaction the year before. With acres of used pre-owned equipment sitting in a yard to be sold, some owners will forego placing equipment in this type of market by stacking their rigs and accessories to avoid selling their assets for a fraction of their original cost by calling it a temporary inactive market.

What has become reality in the secondary market through private or public auctions is a wider audience than in the past. Through the internet, participants include end users and vendor competitors who bid on the same equipment. Some will restock their working inventory, while others will resell their used equipment. Reserves and premiums will be stipulated as to what minimums from a sale transaction will be required to have a successful venue. The bidder needs to be knowledgeable as to whether those assets will just be sold to the lowest bidder, or will be pulled and resold at another venue at another time. Comparing these sales results are the responsibility of the appraiser to weigh and measure if these transactions best fit the present value requested by the periodic lease review.

Whether the situation of the seller in the oil patch is dire or can be a “wait and see,” the fact is companies need assets to generate profits and the leasing industry provides those assets and structures the lease terms and conditions to meet the customers’ needs.

To be more educated on the lease accounting model, I leave it to the experts as to what should be considered for the legal and tax construct to effectuate the commercial need to transfer rights to use property with the various definitions. What tests need to be vetted and approved to qualify as a fair market to the balance sheet should be matched to what choices are available at the time of a conceivable sale.

Unless otherwise specified, all definitions are taken from American Society of Appraisers, Valuing Machinery & Equipment: The Fundamentals of Appraising Machinery and Technical Assets Third Edition (Washington, D.C.: American Society of Appraisers, 2000, 2005, 2011).