Monitor - November/December 2011

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 lease investment.

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 wbleasing101@aol.com. 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.

CONCLUSION —
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

ASSET MANAGEMENT ISSUE JAN/FEB 2012:

|JAN/FEB2011 asseTManageMenTissue MoniToR exclusive:

asseT ManageRs look ahead – ChALLENgES & ExCITEMENT FoR 2011

also inside:
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In addition, the Monitor profiles an industry leader in a new Profile•of•Success. Look for other topical articles, commentary on the state of the industry and a survey of what manufacturing CFOs predict for 2012.