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1 Anders Norlin Mill Valley, CA Financing i of Storage Containers and related equipment Business Consulting Business Brokerage Founded 2001 by Tes and Anders Norlin 1
2 New Lease Accounting Standards What do they mean for an equipment rental company? Models for lessees: Right of use Accounting Treatment Models for lessors; Performance Derecognition Accounting Treatment Effects for lessees and opportunities for lessors 2
3 New Lease Accounting Standards - How exiting!
4 Who is here today? Name Company Product or Service Geographic Market Position Interest How does your company make money? 4
5 Why make changes? Financial Accounting Standards Board (FASB) + International Accounting Standards Board (IASB) = International Financial Reporting Standards (IFRS) Full disclosure of economic benefits and future obligations Address disputable tax advantages for both lessee and lessor Establish consistent international standards 5
6 Definitions of Leases Renting: Short or Long term use of an asset for a periodic payment without transfer of ownership Leasing: Short or Long term use of an asset with an option or requirement to transfer ownership at the end of the lease term IRS Rented or leased property includes real estate, machinery, and other items that a taxpayer uses in his or her business and does not own. Wikipedia A lease is a contract calling for the user (lessee) to pay the owner (lessor) for use of an asset. A rental agreement is a lease in which the asset is tangible property 6
7 Current types of Leases Operating Lease /Off Balance Sheet Lease: GAAP - the economic life time of the assets exceeds the term of the lease IRS - the residual value is substantial relative to the original cost of the asset Example: Fair Market Value Lease Capital Lease / Finance Lease /Conditional Sale: GAAP - the economic life time of the asset is close to the term of the lease IRS the residual value is minimal relative toe the original cost of the value Example: $1 buyout leases 7
8 Other types of Leases Term: Utilization: Performance: Output: Seasonality: lease with start and end dates, fees are based on time fees are based on what capacity of the asset is used relative to time fees are based on the economic performance of the asset fees are based on a quantity that the asset produces payments match the lessees revenue cycle 8
9 IFRS Definition of Leases A contract t in which h the right to use a specific asset is conveyed, for a period of time, in exchange for a consideration The right to use - The right to control Leases are payments based on the time the lessee has the right to use the asset IE : the use of a truck for over 36 months Leases are not payments based on the output the lessee has from the asset IE: the use of a truck for 60,000 miles 9
10 IFRS New Definition of Leases Doesn t address transfer of ownership Doesn t apply if control is transferred and a minimal amount is paid at the end of the term Recognizes purchase options only when exercised 10
11 New Lease Accounting Standards for Lessees For each lease the accounting should reflect: Balance Sheet An asset representing the value of the right to use the leased asset A liability representing the obligation to make lease payments for the right to use the leased asset Profit & Loss Statement An amortization expense of the right to use the equipment A cost of use (interest) expense on the liability of the obligation 11
12 New Accounting Standards New Lease Accounting Standards vs. Traditional Accounting for Lessees Balance Sheet right of use "cost of use" Traditional Lease Accounting Loan Profit & Loss Profit & Loss Profi t & Loss Statement Statement Balance Sheet Statement "cost of Interest use" Cos t** Asset Liability As s et ** Liability** Beginning Year 1* 30,000 30,000 0 Beginning Year 1 Beginning Year 1* 30,000 30,000 0 End year 1 20,000 20,000 2,490 End year 1 12,490 End year 1 20,000 20,000 3,600 End year 2 10, , ,490 End year 2 12,490 End year 2 10, , ,400 End year ,490 End year 3 12,490 End year 3 0 1,200 Total 7,470 Total Cost 37,470 Total 7,200 Pa yments yea r 1-3 Pa yments yea r 1-3 Pa yments yea r 1-3 Right of use 30,000 Lease Payments 37,470 Amortization 30,000 Cos t of use 7,470 0 Interest 7,200 Total Payments 37,470 Total Payments 37,470 Total Payments 37,200 *12 % ** depreciation and amortization 3 years 12
13 New Lease Accounting Standards for Lessors the Performance Obligation Approach Lessors should adapt the right-of-use principle p when the lessee is given the right to use the underlying asset, at the contracted price, for the entire term regardless of changes in price and availability of similar assets. Balance Sheet An asset representing the value of the lessees right to use the leased asset A liability representing the obligation to provide the right to use the leased asset An asset representing the tangible leased asset, net of accumulated depreciation Profit & Loss Statement An amortization expense of the lessees right to use the equipment An interest expense on the liability to make the lease payments Lease revenue and cost of depreciation of the tangible asset 13
14 New Lease Accounting Standards for Lessors the Derecognition Approach Lessors should adapt the derecognition approach when the economic benefits associated with the leased assets are transferred to the lessee at the beginning of the lease term Balance Sheet An asset representing the discounted values of the contracted right to use payments A liability representing the obligation to provide the right to use the leased asset to the lessee An asset representing the tangible leased asset, net of accumulated depreciation Profit & Loss Statement An amortization expense of the discounted values of the contracted right to use payments An interest expense on the liability to make the lease payments Lease L revenue and cost of depreciation i of the tangible asset 14
15 Right of use Method New Lease Accounting Standards for Lessors Right of Use vs. Derecognition Method Lease Assets Lease Obligations Tangible Asset* Dereconition Method Lease Assets Lease Obligations Tangible Asset* Beginning Year 1* 30,000 30,000 30,000 Beginning Year 1** 31,060 30,000 30,000 End year 1 20,000 20,000 24,000 End year 1 21,676 20,000 24,000 End year 2 10,000 10,000 18,000 End year 2 11,354 10,000 18,000 End year ,000 End year , Payments year 1-3 Payments year 1-3 Right of use 30, Lease Payments 37,470 Cost of use 7,470 0 Total Payments 37,470 Total Payments 37,470 *Depreciation 5 years ** Lessors cost of funds 10%
16 New Lease Accounting Standard Methods Right of Use Derecognition Equipment Risk Yes No Finance Risk No Yes Traditional Lease Types Operating Capital Equipment Risk Yes No Finance Risk No Yes 16
17 New Lease Accounting Standards What the balance sheet will include: Equipment Leases Service Agreements Licensing Agreements Property Rental Agreements Long term sales agreements Long term purchase agreements No distinction between core and non-core assets All leases will be reflected on the balance sheet 17
18 New Lease Accounting Standards Implications for the Lessee s Off balance sheet leases no longer possible Pressure on strict consolidation covenants Detailed tracking and accounting of long term commitments Use of different methods Right to use and Derecognition depending on lease agreement and asset type 18
19 New Lease Accounting Standards Implications for lessees More asset tracking More administration Tighter g loan covenants 19
20 New Lease Accounting Standards Implications for the Lessors Customer oriented lease terms and conditions Use of different methods Right to use and Derecognition depending on lease agreement and asset type 20
21 IFRS to be introduced in 2013 Talk to your CPA! Talk to your customers! Questions CommentsC Thoughts 21
22 Thank you! 22
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