Lease Accounting Changes & The Fleet Leasing Industry
Newly proposed accounting rules will have a slight impact on the fleet leasing industry. Lessees and lessors should be aware of the potential changes.
Click here for a pdf of the print version of this article
The Lease Accounting Project is moving along slowly, but surely, and will impact both fleet lessees and lessors. The good news is the financial impact will be small. The bad news is that lessees must do more work to account for their leases. There will be a new exposure draft of the proposed rules issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which has slowed down the project. FASB and IASB have made significant changes (mostly positive for the industry) to the original exposure draft and needed to re-expose the project. The second round is good news because it allows the industry one more opportunity to comment and influence the outcome on the few remaining troublesome issues.
Overview of Changes
As of Oct. 24, 2011, the proposed new accounting rules appear to pose little impact to the fleet leasing industry. Lessees will continue to lease for all the reasons they do now, except that the lease will be capitalized on balance sheet at about 26-30 percent of its cost for a typical 12-month floating rate level principal amortization open-end fleet lease (see figures 1 and 2 for an example
). This is still a meaningful accounting benefit versus borrowing to buy, which naturally would capitalize 100 percent of the vehicle cost. In a three-year fixed rate level payment closed-end fleet lease, the lease will be capitalized on the balance sheet at 67 percent of the vehicle cost (see figure 3
) which is also significantly less than borrowing to buy the vehicle.
The lessor rules will be an improvement over current operating lease accounting in that a lease receivable and a residual will be recorded on the balance sheet and the revenue pattern will be similar to current direct finance lease accounting. Under current accounting rules, most fleet leases were classified as operating leases for the lessor (not a favorable accounting method).