By Mike Quimby, Senior Vice President & General Manager, Element Fleet Management
If you’re a fleet manager, chances are you’re aware that the Financial Accounting Standards Board (FASB) is moving forward with a new standard requiring companies and organizations to include lease obligations on their balance sheets.
“We believe that this new standard is important because it will provide investors, lenders and other users of financial statements a more accurate picture of the long-term financial obligations of the companies to which they provide capital,” said FASB Chairman Russell G. Golden in a press release.
There are two popular types of fleet leases, open-end and closed-end leases. Historically, businesses and organizations have used operating leases to keep assets off of their balance sheets, effectively treating lease payments as a rental expense. This is commonly referred to as the risk and reward method, as the lessor takes on the risks and rewards of asset ownership.
However, with the pending change, companies will be forced to take a right of use approach to accounts for lease contracts. When the rule takes effect, lease assets and liabilities will need to be recorded at the net present value of the future payments.
While the rule doesn’t go into effect until 2018, companies need to start thinking about how they will implement the new rules now.
What this means to fleet managers
There are no changes expected in how your fleet management relationship is managed. However, you should be prepared to field the following inquiries from your in-house accounting team:
−Request to review the master lease agreement
−Need to understand what is known and available about each vehicle lease
−How easy is it to get key information about a lease?
- Amortization term
- Capitalized cost
- Expected lease life
- Interest rate used in the lease
- Monthly payment
- Other lease related fees
Be ready for additional information requests
- Consider reaching out to your finance team early and help them understand the TRAC lease and set expectations to smooth the transition
- Educate yourself and be prepared to answer requests for information about the changes that affect the lease or decisions to buy out the lease
- Know where to go for reports/information needed for lease assessments and accounting entries
- Work with your external auditors for guidance as the rules continue to get defined/interpreted
While there is still much to be sorted out regarding actual implementation, it’s important to remember that with the change, all leases will be recorded on the lessees balance sheet. Your fleet management provider can be a resource providing invaluable insight in the months leading up to the change.
Have your own thoughts on the pending FASB changes? Leave a comment or send us a tweet, @ElementFleet.
Each month Fleet Management Weekly features insight from Mike Quimby, senior vice president and general manager at Element Fleet Management.