Proposed Lease-Accounting Rules Changes Could Harm Motor Carriers’ Balance Sheets

This story appears in the July 1 print edition of Transport Topics.

An ongoing battle over proposed changes in lease-accounting rules has made it increasingly important for fleets to pay close attention to the complex and far-reaching issue, according to several industry experts.

Lease accounting resurfaced in a May proposal by the Financial Accounting Standards Board, which calls for leases longer than one year to go onto a firm’s balance sheet as an asset or a liability. That private organization, which creates commonly used accounting rules, has been debating the issue since 2006, said Ralph Petta, chief operating officer for the Equipment Leasing and Financing Association trade group.

FASB did not return a call to Transport Topics by press time.

However, Grant Thornton LLP partner John Hepp told TT the board also wants to change its definition of a lease.

“The way a business arrangement is structured may have a very large impact on the accounting treatment,” Hepp said. “There will be opportunities to structure agreements for owner-operators that could make an arrangement not be a lease. It is possible that a truck can exclusively be driven by an owner-operator, and it may not be considered a lease, so the accounting wouldn’t change at all.”

Another key issue is how FASB’s proposal changes the way a lease value is calculated, Petta said.

The proposal calls for lease payments to be “front-end loaded,” Petta said, making a lease more costly for lessees at the outset and increasing costs on the lessors’ balance sheet.

That is a significant change, he said, from the current approach that spreads payments out equally. That makes it easier to calculate costs and lowers lessors’ debt levels.

“This is the time to be active,” Hepp said, because comments on FASB’s plan are due by Sept. 13. “If you feel your business will be affected, you will have to make a comment.”

Hepp also said no changes are imminent, noting that the accounting board likely will wait until the end of 2014 to take final action.

Todd Amen, CEO of tax consulting firm ATBS, said FASB is “trying to quantify the liability exposure between lessors and lessees.”

If leases go onto the balance sheet as liabilities, he said, companies with extensive obligations could have their borrowing power reduced.

Amen also said he doesn’t expect the proposal would affect tax returns for owner-operators or small businesses because they typically file as sole proprietors, meaning they don’t use balance sheets.

Paul Will, CEO of Celadon Group told TT the company, in effect, has become an early adopter of FASB’s proposal because it already puts leases on the balance sheet.

“This has more impact on a highly leveraged fleet,” Will said. “What a lot of people don’t look at when they finance fleets is the off-balance-sheet debt.”

Will said the changes won’t have any effect on lease-to-own arrangements between Celadon and its drivers because the company owns the equipment and it is on the balance sheet.

“I don’t think you are going to see a lot of fleets change their leasing patterns,” Tom James, CEO of Truck Renting and Leasing Association, told TT. “Trucking is a business, and it all gets down to the numbers. Capitalizing a lease on a vehicle still costs less than a purchase.”

James said nearly all truck leases are done with private fleets, which often favor leases because increasingly complex truck engines can create maintenance cost uncertainty for companies whose expertise is something other than trucking.

National Private Truck Council CEO Gary Petty declined to speak with TT about the issue.

While James said he didn’t think there would be much overall change in leasing patterns, he criticized the FASB for creating a complicated, new approach to the issue.

“It is a very significant change,” from an accounting standpoint, James said. “Trala and its members think they are going about this the wrong way. They have come up with an academic solution that really doesn’t reflect the realities of the economic situation.”

Steve Lawrence, CEO of Lawrence NationalLease and Trala’s current chairman, said, “We are uncertain about how this is going to affect us.” Many of Lawrence’s customers run between five and eight vehicles and don’t need or want any more complexity or regulations.

“What we try to help them with is the regulatory side of this,” he said. “Our goal is to be able to educate lessees on how to handle this and what the effects will be on their businesses.”