Accounting Boards Propose Rules Change That Could Alter Truck Leasing Industry

This story appears in the April 6 print edition of Transport Topics.

An accounting rules shift could trigger fundamental changes in a truck leasing market worth as much as $70 billion by reducing the attractiveness of renting equipment and reducing fleets’ access to debt.

The proposal by the U.S. Financial Accounting Standards Board and the International Accounting Standards Board to include all leases as debt and assets on the lessee’s balance sheets immediately raised questions among truck leasing interests.

“Our members are concerned because we don’t want new standards put in place that makes our business a less-viable option,” said Tom James, senior vice president at the Truck Renting and Leasing Association. “If you are a lessor, that is your biggest concern. This won’t be the final proposal, if we can help it.”

James said the change also could affect a lessee’s decision over whether to buy or lease equipment, especially among private fleets that prefer to invest capital in their core assets and not on transportation equipment.

A change that adds debt on a lessor company’s books could make it harder for the company to get financing, especially if it has debt covenants that limit borrowing availability, said Ralph Petta, vice president for research and industry services at the Equipment and Leasing Finance Association.

The March 19 proposal, called a discussion paper, said every lease should be shown on the financial statements of lessees because they create liabilities for future rent payments and assets in the form of the right to use assets such as trucks.

The 109-page document issued by the private-sector groups, which set standards for corporate financial reporting, was sparked by a Securities and Exchange Commission report regarding lease accounting. The accounting groups will receive comments until July 17 and will issue a draft of the final rules next year, with planned implementation in 2011.

“The proposals contained in this discussion paper are intended to improve the transparency, credibility and usefulness of lease accounting,” said Robert Herz, chairman of the FASB.

Truck leases now fit into two categories: finance leases that are included on the lessee’s balance sheets as assets and liabilities, and operating leases that are not shown on that statement.Problems arise because of the different accounting for finance and operating leases, the accounting groups said. Those differences make it more difficult to compare and assess a company’s performance, the boards said.

“Truckers have used operating leases as a way to shift the risk of ownership,” he said. “For economic reasons, they shifted that responsibility to the leasing company that, in many cases, is better prepared to take on those costs.”

“Many truckers don’t want to have assets,” said Petta, who estimated the truck leasing market at $60 billion to $70 billion, based on an ELFA survey. “They are willing to utilize the assets, but they aren’t interested in owning them. The lessor is the one that takes on the risk of ownership and takes the depreciation.”

Art Garcia, senior vice president and controller of Ryder System Inc., said the potential changes are important issues for Ryder, because it is one of the largest truck lessors.

Ryder’s full-service lease business generated $2 billion in revenue last year, with 120,000 units that were under lease. Fewer than 20% of those transactions were covered by finance leases, he said.

“We are conceptually in favor of looking at lease accounting rules,” Garcia told Transport Topics. “We are trying to work with the FASB to make sure any changes reflect market conditions.”

Garcia said Ryder’s full-service lease is more than providing a vehicle, because it provides added value, including maintenance and ancillary services, such as tax payments.

TRALA hasn’t taken an official position on the discussion paper, James said.

“We want to have workable rules that reflect the economic reality of the lease transaction,” he said.

“The main issue is the one-size-fits-all aspect. There needs to be some classification of leases based on their term, content and the value of the asset,” James added.

The proposed changes affect accounting on only lessees’ books. The boards decided last year to deal with lease accounting for lessors in a separate review process.