[PEIIISKE J Cheri J. Himes. CPA Vice Presid ent Controller September 10, 2013 Submitted via email (director@fasb.org) Technical Director Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, (T 06856-5116 Re: File Reference No. 2013-270 Oear Technical Director: Penske Truck Leasing Co., L.P. ("PTL"J appreciates the opportunity to comment on the Financial Accounting Standards Board's ("FASB") Exposure Draft of the Proposed Accounting Standards Update (Revised): Leases (ASe 842). issued May 16, 2013 (the "ED"). PTl is a leading provider of transportation services and supply chain management. PTl operates full-service truck leasing, commercial and consumer short-term truck rental, and contract maintenance businesses in the United States and Canada and an internat ional logistics business in North America, South America, Europe, and Asia. PTl's full-service leases include significant executory components, such as maintenance, licenses, and substitute vehicles, and average lease terms are relatively short in comparison to the economic life of the assets being leased. As an equipment lessor, property and equipment lessee, and user of financial statements, PTl has a great interest in the leases Project. PTl feels the ED contains too much complexity and does not accurately reflect the economic nature of many lease transactions. The substantial initial and ongoing costs, both for PTl and its customers, of implementing the proposed changes may very well exceed any incremental benefits to users of these parties' financial statements. PTl requests the FASB to conduct a thorough cost-benefit analysis of its proposed lease accounting changes, including the full range of implementation requirements on both lessors and lessees. PTl hopes this additional analysis will cause the FASB to reconsider its current proposals. PTl also believes the leases Project's primary purpose of improving financial reporting is not achieved in the ED. Users of financial statements utilize lease information in a variety of ways and have differing conceptual views of lease contracts. leases could be considered similar to financing transactions, service agreements, a series of forward contracts, or somewhere in between. Accordingly, users frequently make their own adjustments to GAAP financial statements (for example, the three major rating agencies each use a different approach). The ED Penske Truck Leasing Rt, 10 Green Hills PO BOM 563 Reading, PA 19603 0563 Tel 610796 6514 cheri.himescpenske.com gopenske.com
attempts a compromise solution that ultimately does not satisfy the divergent needs of users, who would still likely need to continue making their own unique lease-related adjustments to financial statements. The proposed guidance will make these adjustments more difficult to perform than under the current lease accounting standards. In any change so dramatic as envisioned in the ED, the resulting confusion will far outweigh any benefits. PTl considers the ED to be so complex that it does not improve the quality of information available to users of financial statements. The ED also places an unnecessary economic burden on both lessors and lessees. While performing outreach with stakeholders, the FASB is encouraged to consider whether maintaining (or even simplifying) current recognition standards while enhancing disclosure requirements will better satisfy the needs of financial statement users. PTl believes there are easier, less confusing ways to reflect the economics of lease transactions within financial statements. Responses to certain questions presented in the Exposure Draft: Question 2: Lessee Accounting Do you agree that the recognition, measurement, and presentation of expenses and cash flows arising from a lease should differ for different leases, depending on whether the lessee is expected to consume more thon an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why? PTl does not feel "more than insignificant" consumption of economic benefits provides clarity or is a proper approach in determining appropriate lease accounting standards. PTl recommends using consumption of substantially all (80% or more) of the economic benefits as the trigger for interest and amortization expense recognition, similar to the proposed classification guidance for Type B (property) leases. PTL's full-service equipment lease customers are paying for the temporary right to use the underlying asset and not financing the acquisition of a portion of the asset, while residual and obsolescence risk remain with PTL as the lessor. Full-service equipment leasing is not simply an alternative to debt financing; it entails operational business decisions that customers make reflecting a much broader set of factors than just funding. PTl's fullservice leases have lease terms that are significantly less than the economic life of the underlying assets, a majority of which are repurposed into PTL's rental fleet or sold to third party users once the assets come off lease. PTl's full-service equipment lease customers are provided with equal access to the lease asset over the lease term and the subsequent accounting should reflect equal expense for equal access over time, similar to the proposed guidance for Type B leases. lastly, the separate classification and presentation of lease assets and liabilities based on consumption of substantially all of an asset's economic benefits would more closely align with tax and legal classification than the current proposal.
Question 3: Lessor Accounting Do you ogree thot 0 lessor should apply 0 different accounting approach to different leases, depending on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset? Why or why not? If not, what alternative approach would you propose and why? There are two issues raised by this question. First is the economic burden to PTL and similar lessors of needing separate systems to manage the different accounting approaches. This is not just an accounting issue. Customers will demand invoicing to be changed so that invoices can be easily coded for payment upon receipt. Implementing and managing separate accounting and billing systems will be a very time consuming, costly, and unnecessary expense. Second is the issue of decreased utility for users of financial statements. PTL does not believe a need exists to modify current lessor accounting standards. The ED will make it more difficult for financial statement users to evaluate lessors that have different business models or asset types. Furthermore, a receivable and residual method with accelerated lease-related income recognition does not accurately reflect the business model of lessors such as PTL who provide a significant 'bundled' service component to their leases. PTL's full-service equipment leases are essentially long-term rentals of capital assets accompanied by additional services, such as maintenance, repair, servicing, and fuel services. PTL's full-service leases do not contain purchase obligations, bargain purchase options, or residual value guarantees. As such, PTL retains much more risk than a financing lessor that is providing a lease as an alternative financing method. Straight-line lease revenue and depreciation expense recognition would better represent the economics of business models similar to PTl. Question 4: Classification of leases Do you agree that the principle on the lessee's expected consumption of the economic benefits embedded in the underlying asset should be applied using the requirements set out in paragraphs 842-10-25-5 through 25-8, which differ depending on whether the underlying asset is property? Why or why not? If not, what alternative approach would you propose and why? PTL strongly disagrees with using the nature of the underlying asset as a basis for lease classification. This seems to be an arbitrary distinction without a sound conceptual basis. Having different classification and subsequent recognition models for leases with similar economic structures will result in unnecessary complexity and confusion for users of financial statements. Property and equipment leases should be held to the same classification standards. Question 6: Variable Lease Payments Do you agree with the proposals on the measurement of variable lease payments, including reassessment if there is a change in an index or a rate used to determine lease payments? Why or why not? If not, how do you propose that a lessee and a lessor should account for variable lease payments and why?
PTL believes variable lease payments which are not in substance fixed lease payments should not be included as lease payments, which is consistent with the FASB's proposed guidance for variable lease payments not based on an index or rate. However, this guidance should also be extended to variable lease payments that are based on an index or rate, such as Consumer Price Index ("epi"). Related payments would not be recognized until the future event occurs, similar to current accounting treatment of contingent rentals. Disclosure of such lease provisions would be sufficient for the needs of most users of financial statements. Question 7: Transition Subparagraphs 842-10-65-1{b) through (h) and (k) through (y) state that a lessee and a lessor would recognize and measure leases at the beginning of the earliest period presented using either a modified retrospective approach or a full retrospective approach. Do you agree with those proposals? Why or why not? If not, what transition requirements do you propose and why? Are there any additional transition issues the Boards should consider? If yes, what are they and why? The changes proposed by the ED would be enormously burdensome. If implemented, PTL could expect to incur significant costs in obtaining relevant data for existing leases, maintaining the lease information in a new accounting system (which may not yet exist), training associates, and developing and implementing new processes, such as customer invoicing. PTL urges the FASB to more fully evaluate the broad requirements for implementation and select an effective date that provides ample time to accomplish these tasks. Question 9: Nonpublic Entities To strive for a reasonable balance between the costs and benefits of information, the FASB decided to provide the following specified reliefs for nonpublic entities: 1. To permit a nonpublic entity to make an accounting policy election to use a risk-free discount rate to measure the lease liability. If an entity elects to use a risk-free discount rate, that fact should be disclosed. 2. To exempt a nonpublic entity from the requirement to provide a reconciliation of the opening and closing balance of the lease liability. Will these specified reliefs for nonpub/ic entities help reduce the cost of implementing the new lease accounting requirements without unduly sacrificing information necessary for users of their financial statements? If not, what changes do you propose and why? The noted relief is marginal, at best. A significant portion of PTL's customer base is comprised of small, nonpublic companies operating fewer than ten vehicles. Even with the ED's proposed reliefs, the remaining requirements will still place a heavy burden on nonpublic entities and small and midsize businesses that may not have the necessary resources or expertise to implement. Differences in accounting expense recognition compa red to income tax deductibility will result in complicated deferred tax asset accounting for lessees.
Other Considerations The ED also fails to adequately address how lessees of leases with significant service components could efficiently allocate lease and service cost components unless they would now be required to submit separate pricing requests for each component. For both fu ll service lessors and lessees, this would be an additional unnecessary administrative burden. In addition, the ED supersedes the current definition of "fair value of leased property" without re-defining it, providing further confusion to lessors. Sincerely, ~ Cheri J. Himes, CPA Vice President - Controller Penske Truck leasing Co., lop.