IMPACT TO LESSORS
• • There will be no more operating lease
accounting for FMV leases for lessors except
for short-term leases. This is great news as
the earnings pattern under the R&R method
is more representative of the economics of
the lease. The earnings pattern under an
R&R lease without a sales-type gross profit
creates a constant yield versus the declining
residual equipment. It would be nice to get the FASB/
IASB to retain straight line rent expense for lessees
for what are now operating leases. This can only be
achieved if enough comment letters are sent in with
well thought out reasoning. m
BILL BOSCO is president of Leasing 101, a lease
consulting and training company. He has more than
35 years experience in the leasing industry, with
expertise in accounting, tax, structuring and pricing.
He has product development and strategic marketing
experience as well. He has been on the ELA accounting
committee since 1988 and was chairman for ten years.
Bosco was selected by the FASB/IASB to be a member
of the Lease Accounting Project Working Group. He
can be reached at 914-522-3233, or by e-mail at
firstname.lastname@example.org. For more information on the
company, visit www.leasing-101.com.
• • Synthetic leases will be classified as R&R
method leases. A PV lease receivable and
plugged residual will be booked. The residual
guarantee is not considered a minimum lease
payment as per current GAAP (not the best
outcome as you can’t “securitize” a residual and
get off balance sheet treatment as a residual
is not considered a financial asset). There
will be no need to buy residual insurance for
accounting purposes, as synthetic leases will
not be treated as operating leases.
• • For manufacturers/captives sales-type lease
profit will be recognized up-front for all but
short-term leases. Gains on sale will be
recognized based on the portion of the value of
the right of use transferred in the lease, with
the balance (the residual portion) deferred.
The value of the right of use is the PV of the
rents, so if the rents PV to 79% of fair value of
the leased asset, then 79% of the gross profit
will be recognized. The gross profit attributed
to the residual will be deferred and recognized
when the asset is sold or re-leased. I think
that this is good news for this segment as
many leases are operating leases and current
GAAP does not allow sales-type gross profit
recognition for operating leases. The residuals
in this segment are so high that buying
residual insurance to get sales-type lease
treatment under current GAAP is too costly,
but now residual insurance will not be needed.
THINGS ARE NOT SO BAD!
This market segment seems to be faring pretty well
as many of the transactions are debt products.
The high-tech FMV leases should have capitalized
present values that are low enough compared to
the equipment cost to remain attractive. Lessors of
the high-tech FMV leases should be happy, as the
operating lease accounting method will be replaced
by the R&R method with a more rational revenue
pattern. Also all leases will be sales-type leases but
with the portion of the gross profit related to the
residual deferred. This is good news for captives in
this segment where the equipment has high residuals
but may not be so great for those lessors with low
IN THE NEXT ISSUE OF THE
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survey of what manufacturing CFOs predict for 2012.
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