Jun25 |
What now? The latest word is that Alabama Governor Bob Riley is expected to sign a bill to raise revenue to help Baldwin County (Alabama) achieve its strategic plan, along with paying for some legislative delegation offices, and two historic sites. The largest costs in the strategic plan are related to road and bridge infrastructure. The bill allows the county commission to assess up to a 4 percent charge on the lease of "tangible" property, and up to 1.75 percent for vehicles, manufactured homes, truck trailers and tractor trailers. Fortunately for us, it does not apply to videos or boat docks. The tax, even without the videos, is expected to generate around $2 million a year. State Representative Joe Faust sponsored the bill. I feel like I may have to pull a Biff Tannen on this guy. “Hello? Hello? Anybody home? Huh? Think, Faust. Think!” This bill has flaws at many levels. Right off the bat, it is an attack on the level playing field principle that ELFA so tirelessly promotes. Furthermore, it not only unfairly targets a specific industry (leasing!), it also has the potential to do harm to several other sectors of the local economy. For certain leasing customers, a residual-based lease payment is the only way they can afford to acquire equipment. For others, the matching of use, costs, and revenues provided by lease financing is a perfect fit with their business model. The costs of equipment acquisition just went up for these customers, but not for those who can pay cash or have larger lending facilities.
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Jun 2 |
Shortly after bemoaning in a recent post that I was not as young as I once was, I discovered that I wasn’t cool either (and not just in the eyes of my teenage children). Now, this probably doesn’t come as a surprise to those of you who recognize my penchant for accounting, but still, it brought me up short to find out that I work in an industry that isn’t considered cool. A double whammy and a cold one at that! How did this startling revelation come to light? As I have said before, we need to bring in the future, future leaders to maintain the viability of the leasing industry. ELFA’s Industry Future Council and Executive Roundtable attendees also have identified this as a critical factor. One of the impediments they identified to doing so, however, is the perception of the leasing industry. Back in the day, the leasing industry had cachet. It was fast moving, developing, and a breeding ground for new products and ideas. This is no longer the case. In addition to lacking visibility with young professionals and graduates, the leasing industry no longer has that “cool factor.” What that means, I am not exactly sure, but apparently has something to do with an inability to impress people in the bar when you tell them you work in the leasing industry. Something to do with the ‘job du jour’ mentality and leasing not being in the inner circle of hot jobs. In fairness to the comment, though, I have to say that I am getting similar feedback from younger leasing professionals as to the long-term prospects of leasing.
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May31 |
As reported in Leasing News, Sterling Financial is struggling to survive in the aftermath of a major internal fraud committed at one of its financial services affiliates, Equipment Finance, LLC (EFI). Sterling currently expects to record a cumulative after-tax charge to its 2006 financial statements of approximately $145 million to $165 million, based upon the results of the investigation’s preliminary findings. Again, in the grand tradition of Enron, Tyco, and Worldcom, shareholders are going to take the hit. Which begs the question – “Where was SOX?” Depending on with whom you speak, the Sarbanes-Oxley Act is either a costly, knee-jerk reaction to corporate excesses or a boon to shareholders in the form of protection from predatory executives. Although many people at the time thought that SOX, particularly Section 404, was essential to restoring confidence in the US capital markets, there have been many who subsequently have expressed reservations about its effectiveness. Even Michael Oxley, for whom SOX is named, recently stated that the act, if not wrong itself, was poorly implemented. Irrespective of where you stand on the issue of SOX efficacy, the bottom line (how’s that for sweet accounting talk?) is that SOX was not an issue in the Sterling Financial debacle. Section 404 requires companies and their auditors to examine and report on the processes behind their financial reporting, with an emphasis on evaluating the internal controls associated with those processes.
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May18 |
We all hear about the graying of America, with many of us actively participating in the process. It’s a fact of life that the nation, on average, is getting older. What has been apparent to some of us in the leasing industry, however, is the concomitant graying or our industry and the associated ramifications. Although these discussion have been going on for the past several years, they really hit home when industry participants pass away, or suffer from age-related problems, such as Bob Baker’s recent hospitalization. The first thing that comes to mind is concern and sympathy for Bob and his family (our thoughts and prayers are with you). Then comes the reflection, both personal and professional, on what aging brings. When is something similar going to happen to me or one of my colleagues? Will I be ready? Are there things I should be doing to prepare for such an eventuality? How will my family and business fare? Sobering thoughts, and probably ones we don’t particularly care to dwell on, but not wanting something to happen doesn’t make it not happen.
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Apr27 |
Word coming out of the recently held IASB/FASB lease accounting working group is that things may not be as dire in the lease accounting world as was first predicted. True, the aristocrats of accounting alchemy are still determined that the risk and rewards model currently being used will be replaced, but, fortunately, the ‘right to use’ model is out in front of what is know as the ‘whole asset’ approach. Furthermore, how that ‘right to use’ may be measured is becoming clearer. Under the whole asset approach to accounting for leases, the fair value of the asset would be capitalized in the lessee’s books, effectively eliminating any off balance sheet financing at all. The ‘right to use’ approach, however, depending on the model adopted, may still retain some off balance sheet features. Under one ‘right to use’ model, the lessee’s obligation to pay would be put on the balance sheet, along with the fair value of any purchase option, potentially putting the entire asset on the books (along with creating a derivative accounting nightmare for our industry). Fortunately, it looks like the direction the debate is heading is to adopt what is, essentially, capital lease accounting for most leases (note the “most” comment). Under this ‘right to use’ model, the residual would still remain off the balance sheet, which, for some collateral types such as aircraft, can be significant. There also has been some discussion of exempting true usage leases, such as computers, power per seat, click contracts, etc., and, of course, the perennial favorite, small ticket leases. I can see it now – that $50 million deal you were working on? Well, it now has 5,000 schedules.
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Mar 4 |
Okay, I just couldn’t pass this one up. With a 412 to 0 vote, the House of Representatives passed legislation requiring the SEC, Public Accounting Oversight Board, and FASB to reduce the complexity in financial reporting. And this from the same bunch that brought us Sarbanes-Oxley! I mean, come on people – what are you thinking? (For some reason, the allegory of trying to put the genie back in the bottle comes to mind.) The bill, entitled "Promoting Transparency in Financial Reporting Act of 2007," requires that a representative from each of the above-noted standard-setters annually appear before the Financial Services Committee and submit testimony on their efforts to reduce the complexity of financial reporting. This is to go on for the next five years, after which, I am certain, the whole problem will be solved. The bill also requires the testimony to include information pertaining to: - Reassessing complex and outdated accounting standards.
- Improving the understandability, consistency, and overall usability of the existing accounting and auditing literature.
- Developing principles-based accounting standards.
- Encouraging the use and acceptance of interactive data.
- Promoting disclosures in "plain English."
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Feb28 |
That’s right – I said ‘step in the shoes’, not ‘don’t step on my blue suede shoes!’ The IRS recently issued final regulations on how to depreciate MACRS property acquired in a 1031 like-kind exchange. The final regs adopt the previously issued temporary regulations with only minor changes. So, for those of you who were concerned about entering into a full-blown LKE program based on temporary regulations, you can now breathe easy and get after it. The final regs still maintain a step-in-the-shoes requirement for depreciating property acquired in an LKE. For those of you not familiar with this process, you have to split the depreciation on LKE replacement property into two pieces. These parts consist of (1) the remaining basis of the relinquished property that is carried over to the replacement property and (2) what is called the depreciable excess basis, which represents any additional consideration paid to acquire the replacement property. If the properties have the same recovery class and depreciation method, the remaining basis of the old property is written off over what is left of its recovery period. The depreciable excess basis is treated like separate property and is depreciated over the applicable recovery period of the asset. As an example, assume you have forklifts with a tax basis $200,000 and three years of depreciation remaining. If you exchanged the old forklifts for new forklifts worth $500,000, you would depreciate the new forklifts in two pieces. The $200,000 piece would be depreciated using the MACRS percentages over the remaining three years, while the remaining $300,000 would be depreciated using MACRS over the next six years (assuming a 5-year class life, of course).
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Feb 6 |
China is continuing its efforts to create a viable leasing and finance industry within the country, as China's Banking Regulatory Commission (CBRC) has lifted a ban on domestic and foreign commercial banks investing in financial leasing companies. The proscription against such investment was originally put in place to keep a separation between the various types of finance companies and the products they offered. Effective March 1, 2007, the CBRC will allow not only banks, but also leasing companies and manufacturers to hold shares in financial leasing companies. Barriers to entry, in the form of capital adequacy, also have been lowered, as the minimum registered capital of a financial leasing company is now around $13 million (an 80% reduction from the previous requirement). A minimum eight-percent capital adequacy ratio, consistent with Basel I, is still required. These actions come on the heels of the second round of consultation on the draft Financial Leasing Law in September of last year. One aspect of this round is a law that would open the country’s aircraft leasing sector to bank capital, which now is one step closer to adoption.
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Feb 2 |
It is time, once again, for that uniquely American ritual of Super Bowl Sunday. Whether you are rooting for the Bears or Colts, looking forward to the Super Bowl commercials, or just confused at the level of hype surrounding the whole exercise, it does provide some great opportunities. Parties, parties, parties, for one thing. Not that one should need an excuse to get together with friends, but this Sunday is prime motivation to do so. The Super Bowl also provides license to consume copious amounts of food and alcohol and act foolishly. (I know these clauses are somewhere in the fine print regarding the event – I just don’t know where.) Of course, some of us take our pleasure from the day in different ways. I for one, will, at some point during the festivities begin to wonder about the role leasing is playing in the event. For instance, how much of the equipment being used that day is leased? Even better, is there some funky thing being leased that I can add to my list of weird leases? By the way, I haven’t heard from many of you on the strangest thing that you have leased, so get on it. Consider the broadcasting requirements of the day, alone. From where does all that equipment come? They need trucks and more trucks just to haul everyone’s stuff, and think about the electronic requirements. Flexibility and usage are the words on this day. What about generators for the venues? Platforms, telecommunications gear, cranes, forklifts, cookers, refrigerators, transportation – the list goes on and on. My guess it that even the stage that Prince sings from will be rented. Great stuff, huh? Oh, and I heard that a game will be played, too.
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Jan26 |
While hanging out with some attorneys the other day (I know – lapse of judgment), the subject of service contracts came up, along with some enforceability issues, lessee practices, and legal foundations. Norvergence, of course, got mentioned. With that as background, I would like to pose some hypothetical questions to the lessees. The primary premise behind the questions is that, unlike the Norvergence situation, the service provider was legitimate, and the equipment was valued properly and had actual utility – basically, how business should be, and normally is, conducted. So, here we go. Situation One – you buy equipment for $28,000 that performs an essential function and that requires some form of service (this may be fuel, electricity, or other form of service). Since the service provider is offering significant savings on the cost of the service if you pay for it up front, in a lump sum, you decide to prepay $12,000 for the services over the next four years. Unfortunately, after 18 months, the service provider goes out of business. 1. Who do you blame for this mess? 2. Do you seek legal redress and, if so, from whom? Situation Two – same situation as One, except you buy the equipment by borrowing $28,000 from the bank, payable at $700 per month over the next 48 months. You also decide to prepay $12,000 for the services over the next four years. After 18 months, the service provider goes out of business. 1. Who do you blame for this mess? 2. Do you seek legal redress and, if so, from whom? Do you continue to pay the bank loan on the equipment, even though it does not work without the service?
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