Critical Developments in FASB Lease Accounting Rules

1. Critical Developments in FASB Lease Accounting Rules 

2. Presenters: ������ John Hepp, Grant Thorton Tom James, President, Truck Renting & Leasing Association (TRALA) CommPartners Event ModeratorCommPartners Event Moderator

3. Agenda Background What is the FASB/IASB lease accounting project? Timing Who is impacted? How are you impacted? Lessee examples What is the industry doing? Q&A

4. 4 Background The Sarbanes Oxley Act required the SEC to do a study of off-balance sheet transactions Lessee off-balance sheet operating leases was cited as a major financial reporting deficiency The SEC directed FASB to put a lease accounting project on its agenda The International Accounting Standards Board (IASB) decided to join in as part of the push to converge world wide accounting rules The Enron scndal was the event that brought off balance sheet accoutning into the focus of the SEC The fact that in an opretaing lease no liability appears on the lessees books is viewed as a problem in fiancail rporting The SEC was the force behind the FASB�s taking uo the project tio change lease accoutning rules. The IASB also viewed lease accoutning as an issue and they decided to work with the FASB to have one lease accoutning rule wolrd wideThe Enron scndal was the event that brought off balance sheet accoutning into the focus of the SEC The fact that in an opretaing lease no liability appears on the lessees books is viewed as a problem in fiancail rporting The SEC was the force behind the FASB�s taking uo the project tio change lease accoutning rules. The IASB also viewed lease accoutning as an issue and they decided to work with the FASB to have one lease accoutning rule wolrd wide

5. 5 The major project objective is to do away with off-balance sheet accounting for operating leases Adopted �Right of Use� approach that capitalizes the lessee�s rights & obligations in the lease contract As opposed to current accounting for the leased asset as on-balance sheet or off-balance sheet Th eobject of the project is to force lessees to rerod an asset and liability for all operating leeases under current accounting rules operating leases are off balance sheet and ony staright lined rent expense appears on the P&L (income statemment) The new approach under the proposed rule is for the lessee to record an asset representing its right to use the leased asset and a liability representing its obligation to pay rent Th eobject of the project is to force lessees to rerod an asset and liability for all operating leeases under current accounting rules operating leases are off balance sheet and ony staright lined rent expense appears on the P&L (income statemment) The new approach under the proposed rule is for the lessee to record an asset representing its right to use the leased asset and a liability representing its obligation to pay rent

6. What is the Project? Lessees: Capitalizes more assets & liabilities than current GAAP with complex calculations & adjustments ignoring lease economics Estimate lease term & payments (renewals, contingent rents & PO�s) and capitalize at incremental borrowing rate with continual adjustments to estimates (even includes FMV options!!) Scope out leases that are financings New definition of a financed purchase Automatic transfer of title Bargain purchase option Lease term = useful life lessor�s return is fixed Gone are the 90% PV and the 75% of useful life criteria all other leases are �right of use� (ROU) leases Treat ROU leases as a purchase of an intangible asset & a loan. Front ends lease expense as straight line depreciation & imputed interest replace straight line rent expense �Fixes� liability issue � but misrepresents the lease asset, P&L and cash flow statement

7. Lessee Accounting Details: Estimate lease term = consider possible renewals and use the longest most likely lease term Estimate payments = renewal & purchase options (including FMV) & contingent rents & residual guarantees Unbundle full service lease payment � lease portion capitalized, service portion expensed as paid Capitalize estimated payments at lessee�s incremental borrowing rate = do a Present Value (PV) calculation and book an asset and a liability Continual adjustments = re-book when evidence that material change in estimates occurred except use the original incremental borrowing rate Treat ROU leases as a purchase of an asset and a loan. Straight line depreciation of the asset and imputed interest on the liability replace SL rent expense = lease costs are front ended (non-cash expense) Deferred tax accounting needed for all leases What is the Project? Deferred taxes arise when there is a difference between tax accoutning and boook accoutning In the case of the proposed rules book expense is front ended while tax deductions are for the cash paid for rent So you book a tdeferred tax recsibvable as you have lhigher book expense than tax deductions.Deferred taxes arise when there is a difference between tax accoutning and boook accoutning In the case of the proposed rules book expense is front ended while tax deductions are for the cash paid for rent So you book a tdeferred tax recsibvable as you have lhigher book expense than tax deductions.

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9. What might the numbers look like?

10. Analysis

11. Key dates Discussion Paper comment deadline � 7/17/09 Over 300 comment letters received to date Exposure draft - mid 2010 Another opportunity to comment Final rule � mid 2011 Implementation date � 2012-13? Transition No Grandfathering Lessors & lessees re-book all leases prospectively

12. Implications for Lessees

13. Cash Flow Statement Impact

14. What is the Industry Doing? TRALA issued a comment letter to the FASB/IASB citing major issues: Estimating payments and adjusting continuously makes compliance costly and burdensome Immaterial leases (cost =/< $250,000) should be exempt from capitalization Lease cost should be straight line Different leases should be accounted for differently Contingent rent and non-bargain renewals are not liabilities to be capitalized Full service leases should not be unbundled � should be service contracts Results: They scoped out finance leases (new definition) Minor changes to review and adjustment process

15. What is the Industry Doing? TRALA & domestic & worldwide leasing trade organizations jointly interacting with the FASB & IASB providing industry input & expertise Helping the FASB/IASB create sensible workable rules, taking the �high ground� (making sure the accounting reflects economics of leases) on issues by writing comment letters & face-to-face meetings Influencing the process to: Keep accounting advantages to lease SL recognition of lease expense No contingent rent capitalization Capitalize only bargain options to renew/purchase Avoid burdensome compliance for our lessee customers PR campaign Engage lessees & manufacturers/lessors encouraging comment letters Meetings, articles & webcasts

16. WE NEED COMMENT LETTERS!!!