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Implementing ASC 842 New Lease Accounting Proves Complex & Significant

A new leasing standard

The Financial Accounting Standards Board (FASB) issued its new leasing standard, Accounting Standards Update (ASU) No. 2016-02, Leases (ASC 842), in February 2016. It’s bringing $2 trillion of operating leases onto public company balance sheets, affecting the entities that enter into lease arrangements or sign contracts containing service agreements that support business operations. This was the FASB’s effort to require reporting of operating leases on balance sheets, in order to ‘increase transparency’ for investors and lenders.

Calendar year public companies adopted the standard in the first quarter of this year. Many found tracking and recording leases to be more time intensive than originally anticipated. About two-thirds of the public companies implementing the standard experienced difficulties in evaluating data and deploying software. Private companies, not-for-profit organizations, and smaller reporting companies had been scheduled to adopt the changes in 2020.

The effective date

But on the heels of the FASB receiving a letter from the AICPA’s Technical Issues Committee requesting a delay, the FASB voted unanimously July 17th to propose delaying the effective date until January 2021 for this group (many lack the resources to effectively handle adoption of the standard in a timely manner). As part of that July 17th meeting, the FASB also discussed whether it would be appropriate to provide longer delays on implementation dates for other companies, and whether smaller reporting companies should have deferred effective dates similar to private companies.

The FASB is considering allowing two years between the effective date for SEC filers and all other groups for future complex accounting updates. Before finalizing the new effective dates, the FASB issued a formal proposal for public comment with a 30-day comment period window ending September 16th. Once finalized, the new lease standard is expected to be effective for private companies for annual reporting periods beginning after December 15, 2020. This is a one-year deferral to the existing effective date.

A FASB board member said moving back the standard’s effective date for private and small reporting companies was about more than compliance. “They don’t have the resources, and if companies want to integrate the information into their business and use it for making business decisions in the future, they need more time.” There is difficulty in tracking down lease agreements and contracts across offices, in identifying embedded leases, and in putting together a transition strategy. The time and resources it takes to determine the impact on financial ratios and covenant compliance can easily be underestimated. Lease-versus-buy decisions may be impacted, and implementation may affect financial results.

Both aviation and rail equipment operators lease significant portions of their equipment under operating leases and related service agreements. They rely on operating lessors and often return equipment to the lessor at the end of the lease term with no residual value risk or exposure. The operating lessor, who retains the risks and rewards of ownership, then depends on equipment expertise and industry contacts to release, reconfigure, and/or trade equipment positions in order to cover their cost of capital and generate investment returns.

The AICPA has called lease accounting ‘significant and complex’. Similarly, maintaining a performing portfolio in today’s market faces unexpected hurdles. For solutions, call RESIDCO.

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Storms on the Horizon – Navigating Uncertainty

Mounting Trade Concerns Slow Supply Chains

Brace for slower economic growth. Freight volumes in the United States and around the World are falling due to escalating trade tensions and an uncertain future. Most recessions have been brought on by mistakes in some combination of fiscal, monetary or financial supervision.

Former Fed Chairman Ben Bernanke once quipped that expansions do not die of old age, they are murdered, most often because of policy mistakes. Our current problems stem from trade policy, which has turned protectionist and is attempting to remake global supply chains. Trade disagreements have heightened business uncertainty and disrupted investment plans in the U.S., Europe, and Asia.

Falling Supply Chain Traffic

Most cyclical indicators are indicating business activity flat or falling. U.S. carload Rail Freight fell 4.8% and Intermodal traffic fell 6.1% in July versus July 2018. Port of Long Beach Containerized traffic was down 9.7%. Seasonally adjusted Truck Tonnage was up 3.3% June 2019 versus June 2018 while Air Freight was down 3.62% May year over year.

Business investment is based on an ability to predict the future environment. Tariffs and investment restrictions have put the expansion in jeopardy. Policymakers have taken growth for granted but are reluctant to announce the possibility of a recession for fear of harming business and consumer confidence. It’s elevated uncertainty which is curtailing economic activity.

China’s Impact on the U.S.

China’s efforts to boost the development of indigenous innovation and technology has resulted in greater intervention by the Chinese Communist Party (subsidies, trade and investment barriers, and discriminatory policies) which negatively impact U.S. intellectual property and technology intensive firms.

China’s goal? To turn Chinese enterprises into world-class globally competitive firms.

The problem? A lack of a relative rule of law in China, widespread government corruption, financial speculation, and misallocation of investment funds. Government connections, not market forces are the main determinant of successful firms in China.

In China, rules and regulations are not consistent or transparent, contracts are not easily enforced, and intellectual property rights are not protected (due to the lack of an independent judicial system).

The Resolve of the American Economy

Before their August recess, Congress passed a major budget bill that suspended the debt limit through July 31, 2021. Government debt takes dollars out of the economy, reducing private investment and slowing economic growth. The larger the debt the more likely you’ll question the Government’s ability to pay back borrowed funds.

Cutting spending would reduce GDP. Raising taxes would slow growth. Our Political Parties are conflicted. Yet America remains the safest economy in the world. It has the largest free-market economy and its currency is the World’s reserve currency. As investors purchase U.S. Treasuries in a flight to safety, they bid up the price, causing interest rates to decrease and the yield curve to invert. A question is how will the administration respond as the 2020 presidential election nears?

Despite the risk, transportation equipment investors need to build for the future, develop talent, and grow their investment business. Weaker demand will reduce asset prices. To navigate uncertain markets the best defense is to be as well informed as possible.

Visit RESIDCO for more information on the latest air and rail investment news.

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