Lessor accounting has been decided with two proposed methods
for equipment lessors. Short-term leases, where the term including
possible renewals is 12 months or less, can still use the current
GAAP operating lease method. All other equipment leases will be
accounted for much like current GAAP direct finance leases. This
is good news compared to what was proposed under the ED and,
thankfully, compared to current GAAP where many leases in this
segment were operating leases for the lessor. They call the new lessor
accounting method the “receivable and residual” (R&R) method.
Under this method, a PV receivable and a “plugged” residual
would be recorded and the leased asset is removed from the lessor’s
balance sheet. The residual asset is accreted over the term so that
the sum of the finance income on the lease rents as collected and the
residual accretion will be the same as the amortization of unearned
income under current direct finance lease accounting. The rate
used to discount the rents and accrete the residual would be the
implicit rate in the lease. Lessors are also required to estimate lease
payments in the same manner as lessees. In leases with bundled
lease payments, lessors must bifurcate the payment and account for
the lease portion using the R&R method and account for the service
portion as revenue when the payment is due for services rendered
(basically the cash basis).
Sales-type lease accounting for gross profits of manufacturers/
dealers will be allowed for all but short-term leases, but the portion
of the gross profit related to the residual must be deferred until the
asset is sold or released. This is good news as more leases will be
subject to sales-type gross profit recognition, but the downside is the
deferral of the portion of the gross profit associated with the residual.
Leveraged lease accounting is a U.S.-only issue (not a product
offered in the healthcare segment) and will be eliminated with no
grandfathering of existing deals. The boards will not allow the “MISF”
yield or a tax-affected yield to be used for revenue recognition for
For real estate lessors there are three methods. For leases of a
whole building use the R&R method as above. For those lessors who
qualify as investment companies use investment property accounting
which is like the current operating lease accounting but where the
residual asset is adjusted to its fair value (up or down as the values
fluctuate). For all other real estate leases use the current operating
TIMING AND TRANSITION
The boards will issue a new exposure draft in the first quarter of
2012 with a 120-day comment period. I urge all readers to submit
a comment letter. The boars will read the comment letters and
re-deliberate and make adjustments if they see fit. This means it
will not be until the last quarter of 2012 that they will issue the new
lease accounting rules. The transition date is likely to be 2016 when
lessees and lessors have to convert all existing leases and begin
accounting under the new rules.
The lessee transition will be as follows:
• • For all capital leases no adjustment will be required. This is
good news because it simplifies transition.
• • For operating leases the lessee will record a liability equal to
the present value of the remaining payments using the lessee’s
incremental borrowing rate at the transition date. The right
to use asset value recorded will be the present value of the
remaining payments adjusted based on the ratio of remaining
rents to total rents from inception with the difference charged
to equity and deferred tax assets. This added complexity is an
attempt to lessen the impact of the front loaded leases cost
pattern that results from the ROU accounting method.
• • Lessees will have the option of using the full retrospective
method where each lease is recorded at inception. This will
lessen the impact of the front loaded lease cost pattern but
will result in a larger charge to equity and deferred tax assets.
The lessor transition will be as follows:
• • For all existing direct finance and sales-type leases no
adjustment is necessary.
• • For all operating leases and leveraged leases, the R&R method
is used at the earliest period presented in the financials
treating the remaining term as the lease term. The boards
do not provide details regarding existing leases that have a
manufacturer or dealer profit, but, although it will be difficult
to calculate, presumably some portion of the remaining gross
profit will be recognized and the portion associated with the
residual will be deferred.
• • Lessors will have the option of using the full retrospective
method where each lease is booked at inception. I see little
benefit to electing this option.
FOCUS ON HEALTHCARE EQUIPMENT BUSINESS SEGMENT
In my opinion the overall impact to the industry will not be great.
IMPACT TO LESSEES
The healthcare market is broad and many of the product offerings are
loans. Those that are leases are generally of high-tech equipment like
MRIs and CT scanners with good residuals and attractive tax benefits
(100% bonus MACRS), so the resent values (capitalized amounts) are
significantly less than cost.
• • Doctor and dentist financings are generally start-up financings
and are loans. For any equipment acquisitions for doctors and
dentists, the liberal tax write offs under §179 would favor
CSA or dollar out transactions.
• • In the hospital business segment, there have been a great
deal of acquisition financings that are loans. Hospitals do use
FMV leases to acquire imaging equipment and the capitalized
amounts should be low enough to keep the lease product
popular. The bigger the PV benefit, the lower the amount
capitalized. Stand-alone imaging centers have traditionally
used the FMV product as well to acquire high tech imaging
• • The traditional reasons for leasing (raising capital, low
financing cost, fixed rates, level payments, transfer of tax
benefits, managing equipment needs, transfer of residual
risk, convenience and service) will continue to exist. The
off-balance sheet accounting reason for leasing will be
reduced but not eliminated as long as the amount capitalized
is less than the cost of the equipment.
• • Dollar out leases will be treated the same as under current
GAAP capital lease accounting — the lease will be capitalized
at 100% of the asset’s price.