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By Marcelle Steyn: InnoVent Rental and Asset Management Solutions
An instalment sale doesn’t just finance ageing hardware. It spends borrowing capacity you haven’t needed yet, on equipment that’s already on its way out.
Every instalment sale for IT equipment makes the same trade, whether anyone puts it in those terms or not: it commits a slice of tomorrow’s credit to hardware that started depreciating the moment it was switched on.
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By the time the loan is paid up, the business has spent years of scarce and expensive credit facility headroom to end up owning something that was never going to hold its value in the first place. Immeasurable opportunity costs that sit outside the income statement and balance sheet!
Most instalment sale facilitators would never frame it that way at signing. The instalment sale looks like a straightforward, sensible way to acquire equipment the business needs. But strip away the familiarity of the structure and what’s actually happened is this: a finite, valuable resource, the organisation’s own borrowing capacity, has been spent on an asset guaranteed to be worth less every year it’s held, with no way out of owning it and incurring the associated costs of disposal once the asset has reached end of life.
The IFRS16 complication
Most CFOs know the basics of IFRS16 by now: some of the leases that used to sit quietly off-balance sheet as an operating expense now show up as a right-of-use asset with a matching lease liability. For a lot of finance teams, that took away one of leasing’s oldest benefits.
What often gets missed is that an instalment sale was never in the running for that benefit in the first place. An instalment sale is a financed purchase, not a lease. The asset and the corresponding loan liability land on the balance sheet immediately, in full, for the whole term, regardless of what IFRS16 does to lease accounting elsewhere. It behaves like debt because it is debt, whether or not the loan happens to arrive through your equipment supplier’s finance partner or your own bank.
The exception IFRS16 built in for exactly this equipment
There is a piece of good news buried in the standard. IFRS16 carves out a specific exemption for low-value assets, items with a purchase price of around US$5,000 or less when new. That threshold happens to cover laptops, desktops, printers, and small to medium servers, which is to say, the exact equipment most businesses finance in volume. Leased on a genuine pay-for-use basis, assets in this category qualify for off-balance-sheet treatment automatically. No argument, no judgement call, no case to build with your auditors.
That is not a loophole. It is written into the standard on purpose. Move that same category of equipment from an instalment sale to a genuine operating lease, and the accounting treatment moves with it: the asset comes off the balance sheet, the facility it would otherwise have consumed stays free, and the covenants, gearing ratios, and borrowing capacity built around that facility stay protected. For a category of spend this common across most businesses, that is not a small technicality. It is one of the more direct levers available for keeping the balance sheet clean.
Why this matters beyond the accounting entry
The balance sheet impact isn’t just a reporting exercise. Every rand of debt-equivalent liability, whether it comes from an instalment sale, loan, overdraft or a capitalised lease, uses up headroom against covenants, gearing ratios, and the return-on-capital calculations that boards and lenders actually watch. Committing several years of that headroom to laptops, desktops, or other end-user devices that lose value from the day they’re switched on is an odd place to spend it, especially when the same headroom could be backing something that generates a return.
The bottom line for CFOs
Now that you know most IT hardware procurement can be taken off balance sheet by adopting an operating lease model as allowed under IFRS16, why would you use an instalment sale structure or any other form of debt such as a loan or over-draft that spends tomorrow’s credit today, on technology that’s already ageing, and forces an ownership outcome regardless of whether the equipment is still worth owning by the end of it?
Marcelle Steyn
It’s worth asking the question before the next instalment sale or debt instrument gets signed: is this really how the business wants to spend its next few years of borrowing capacity?
CFOs are increasingly asking whether credit facilities can be preserved for revenue-generating assets instead of being absorbed by IT hardware that depreciates from day one. An instalment sale spends that capacity years in advance, on equipment that’s already losing relevance. It’s worth asking whether that’s really the best use of scarce and expensive credit facilities.
