February 2, 2012
New accounting practices could impact the truck leasing market.
Denise L. Rondini, Executive Editor, firstname.lastname@example.org
The leasing accounting rules will be changing in the not-too-distant future and that could have an impact on customers’ decisions to lease heavy-duty trucks.
For years one advantage a leasing salesperson could use as a selling point was the fact that with operating leases (full-service leases) the lease transaction was off the lessee’s balance sheet. While the customer gave up the tax ownership of the vehicle, he gained by accounting for the truck off the balance sheet.
“This had certain advantages for the customer on his financial accounting books,” says Lance Bertram, senior vice president of sales and marketing for Idealease. These advantages include the ability to make certain ratios ― especially the debt-to-equity ratio ― look more favorable. “At the end of the day whether you call it a cleaner or more attractive balance sheet, that is what it does,” Bertram says.
A clean balance sheet is important because it impacts a business’ ability to borrow money.
However, largely in reaction to the financial scandals of the late ‘90s and to bring U.S. accounting practices in line with those in the rest of the world, the Financial Accounting Standards Board decided that changes needed to be made to the way leases of all types are accounted for, so that it was clearer to lenders what the true obligations and liabilities of a company are.
While no exact implementation date has been released, Bertram believes we will see the change in the next six to 12 months. The changes will eliminate the distinction between capital and operating leases and require lessees to treat all leases as capital leases and therefore account for them as assets on their balance sheets.
According to Bertram, a recent survey showed that for 20 percent of fleets these accounting rule changes would influence their lease versus buy decision. He explains this means that one out of five customers may choose to purchase their vehicles rather than lease.
However, Bertram is quick to add that off balance sheet treatment is only one of the benefits of leasing.
“While the first thing we talk about when selling a full-service lease is the off balance sheet treatment, there are eight or nine other significant advantages of leasing that many customers place a higher degree of importance on than the off balance sheet treatment.”
He adds, “You can take accounting out of the picture and at the end of the day many companies do not want to be hassled with transportation issues. They just want to manufacture their product and move it to a distribution location. They want someone else to take care of the acquisition of the trucks, the maintenance, the fuel tax reporting, the titling, etc.”
In response to the changes, Idealease has developed a full-service equity lease. “A full-service equity lease takes the old full-service lease and restructures it so that from an accounting and tax standpoint the customer gets the tax advantage,” Bertram says.
The customer becomes the tax owner of the vehicle, something he used to give up with full-service leases but was offset by the advantages he gained in off balance sheet treatment.
What will these changes mean for leasing salespeople? According to Bertram, they are going to have to become very knowledgeable about the changes.
“Your customers are going to expect you to be knowledgeable on this topic. They do not have anyone on staff who understands the intricacies of accounting for transportation vehicles. You are either going to endear yourself to them by being their partners and a trusted expert or you are going to send them off to find someone else who can help them,” Bertram says.
“That is never a good thing.”