Opinion: Trucking and Lease Accounting Changes
This Opinion piece appears in the Aug. 3 print edition of Transport Topics. Click here to subscribe today.
By William Bosco
Accounting Policy Consultant
Equipment Leasing and Finance Association
The Financial Accounting Standards Board and its sister organization, the International Accounting Standards Board, are working jointly on reviewing changes to the current U.S. Financial Accounting Standards 13 and International Accounting Standards 17 for leasing.
FAS 13 makes a distinction between two types of transactions:
• Capital lease — where the leased asset is shown on the lessee’s balance sheet in a similar way to owned assets.
• Operating lease — which is not included on the balance sheet but where details are reflected in the footnotes to the financial statement.
As proposed, revisions to FAS 13 will affect the balance sheets of all companies subject to U.S. generally accepted accounting principles, which use leasing to acquire assets or as part of their asset management strategy.
The Equipment Leasing and Finance Association is concerned about the proposed revisions, fearing that the proposed concepts would be particularly problematic for small- and medium-size companies, which rarely are publicly held. If the changes being proposed do not reflect an appropriate cost/benefits balance, they could raise the cost of capital for U.S. companies that lease vehicles and equipment.
ELFA represents the $650 billion equipment finance sector.
The proposed new standard will be unnecessarily complex for preparers and will lead to lessee accounts being less understandable and comparable than they are under the current rules. Not only will this fail to provide improved information for balance sheet and financial statement users, the new standard may be so costly for preparers that the economic benefits offered by leasing could be obscured.
An example of how the proposed changes would work is a seven-year truck lease with a fixed rent and contingent rents based on mileage where the present value rents and contingent rents will be capitalized at $111,916, or 126% of cost ($89,000) assuming a 7% discount rate. The profit and loss pattern will not represent the economic nature of a rental agreement, as it will be front-ended as level rent expense is replaced by imputed interest on the liability at 7% and straight line depreciation of the capitalized asset. For a seven-year lease with monthly rents of $1,689 and estimated mileage charge of $588, the increase in first-year expense is $3,146, or 15.5% higher than straight line. The cumulative difference peaks at 33% greater in year four of the lease.
The following are among the many issues relating to proposed changes to FAS 13 that should be of particular concern to businesses that lease:
• Increased cost of capital — With more assets on their balance sheets, lessees may be required to hold additional capital.
• Increased cost to small businesses — Complex rules will be applied across the board to all leases, regardless of their size and/or nature. The costs of the proposals are likely to significantly outweigh any benefits for smaller lease transactions and smaller, less sophisticated lessees. Because 95% of leased items are small ticket, these transactions will be most affected.
• Treatment of certain options will be difficult and costly to apply — The new rules would favor a single asset and liability model in an approach that implies lessees will have to determine their most likely lease term when confronted with lease contracts that include options. Requiring lessees to make an estimate of their most likely lease term is unrealistic and burdensome and involves a significant amount of guesswork.
• Timing — Companies across the spectrum are reporting significant decreases in business volume, increases in bankruptcy filings and lowered earnings as a result of the economic environment. An accounting standard that distorts economic reality by accounting for all leases the same way erodes earnings per share, creates deferred tax liability and causes companies to amortize assets more quickly than they should will add unnecessary burden to companies under economic pressures.
Lessees and lessee groups should become involved in the project by providing comment directly to the FASB/IASB.
The author is a member of the IASB/FASB International Working Group on lease accounting in addition to his work with the Equipment Leasing and Finance Association. ELFA’s headquarters are in Washington.
