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September 5, 2018

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Be Prepared For Lease Accounting Changes

There’s a saying in business that goes, “The secret of success is to be ready for change before it happens.”

When it comes to companies that lease trucks, the Generally Accepted Accounting Principles (GAAP) have been that those “operational” leases effectively received off-balance sheet treatment. That’s about to change. New standards unveiled by the Financial Accounting Standards Board (FASB) will soon require that all leases — financed and operational — with terms longer than 12 months be reported on a company’s balance sheet. 

The new rules — effective for fiscal years beginning after Dec. 15, 2018, for public companies and fiscal years beginning after Dec. 15, 2019, for nonpublic companies — have been in the works for about a decade.  The new standard ends one of the largest forms of off-balance sheet accounting and requires more disclosures related to leasing transactions.

The FASB says that the fundamental objective in recognizing assets and liabilities for the rights and obligations created by those leases is increased transparency and helping financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.

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In an opinion column for “Transportation Topics,” Jennifer Wieroniey, Manager of the American Trucking Associations’ National Accounting and Finance Council, said the ripple effect of the new rules will impact fleets of all sizes, but the burden of implementing the new standards will be felt the most by smaller companies and private carriers that typically have fewer administrative resources and smaller accounting staff. 

The good news is that the new standard retains the straight-line expense recognition for operating leases on the income statement. And most importantly, although the operating lease liability will be recorded on the balance sheet as a liability, it will not be classified as debt. Those leasing trucks will need to allocate the rent payment between the portion related to the lease of the vehicle and the bundled services in order to determine the asset and liability amounts to record on the balance sheet.  Although the operating lease liability is not considered debt, she advises companies regardless of fleet size to check with their lenders earlier than later regarding loan regulations, as updated situations could trigger a breach of their covenants, default and, at worst, termination of the loan agreement.

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So, how ready are you for the change? A recent survey by PricewaterhouseCoopers concluded that for privately held companies, the most difficult aspect of complying with the rules is proving to be data abstraction (68% of those surveyed rated it as “somewhat” or “very” difficult). But don’t throw caution to the wind -- errors in accounting statements may lead to having to file restated financials, which could result in monetary penalties and even trigger an audit.

Changes aside, PacLease believes the advantages from an operating lease far outweigh the extra paperwork. The advantages of full-service leasing, such as outsourcing vehicle ownership (to alleviate investing capital in non-core business assets) and related repair and maintenance, remain unchanged.  What’s more, leasing will continue to transfer the vehicle’s residual risk to the lessor, improve and provide predictable cash flow, and give tax benefits — all while providing an additional source of low cost capital.

So, yes.  Accounting rules are a changing…but you’re not alone in wading the waters.

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