Accounting/Regulatory Update Recent & Proposed Guidance

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1 Accounting/Regulatory Update Recent & Proposed Guidance 2006 Captive and Vendor Finance Conference April 11,2006 Deborah Brady Key Equipment Finance

2 Agenda Revenue Recognition EITF D-107D Residual Valuation Interim Rent Lessor Implications Leveraged Lease Accounting Recent SEC Guidance Future Changes to Lease Accounting

3 Revenue Recognition: EITF D-107 Criteria for pooling more restrictive over time. Pooling now being challenged under EITF D-107D D-107 states that RV guarantees of a portfolio of leased assets preclude lessor from determining amount of guarantee of any individual leased asset in portfolio, therefore, no such amounts should be included in MLP Rule is now being applied to vendor guarantees of residual and credit risk Accounting firms are reconsidering their prior view that under a homogeneous concept, similar assets could be treated as one Vendor may not receive sale treatment

4 OCC Residual Valuation Issue OCC took issue with lessors setting residual values based on historical customer behavior The OCC position is that residuals should be valued assuming sale at expiry and not including lessee releases or extensions ELA position paper agreed to by FASB staff All possible outcomes at lease expiry should be factored into residual setting (FASB Con 7) OCC disagreed issued new guidance in April 2005 Residual value = estimated fair value at the end of the lease The present value of expected renewals cannot be considered

5 Interim Rent Lessor Implications Marlin Business Services Corp. announced in March 2005 that the Company was changing how interim rent was treated and would restate its previously issued financials Interim rent rental payments to cover the period between installation of equipment and commencement of the lease Marlin had recognized interim rent as fee income at the time it was invoiced Marlin and its auditors have determined that interim rent should be treated in the same manner as other fixed noncancelable contractual minimum lease payments Non-cash adjustment with no impact on historical or future cash flows

6 Leveraged Lease Accounting Some lessors settled with IRS LILOs/SILOs Settlements impact timing of cash flows not total NI Previous guidance do not rerun leveraged lease FASB concluded that a change in timing of cash flows would result in a recalculation of the lessor s economics with an adjustment to lease earnings (FSP FAS 13-a) Entity does not need to re-qualify for leveraged lease accounting as a result of the recalculation of earnings Expected effective date first quarter 2007 Impacted companies will need to record large below the line catch up adjustment

7 SEC Report Overview SEC issued a report on June 15, 2005 on off-balance sheet arrangements, which was mandated under Section 401(c) of Sarbanes Oxley Report required to address: Extent of the use of off-balance sheet arrangements Whether financial statements reflected the economics of such transactions in a transparent manner SEC found that significant progress has been made in financial reporting since passage of Sarbanes Oxley Room for improvement in reporting of several types of arrangements with off balance sheet implications

8 SEC Report Recommendations Discourage the use of structures that are primarily motivated by accounting results rather than the underlying economics Expand the use by FASB of objective-oriented standards Improve consistency and relevance of disclosures Improve the communications focus in financial reporting SEC report specifically recommended that FASB reconsider lease accounting due to the bright lines tests and all or nothing approach of FAS 13

9 Future Changes to Lease Accounting New Approach to leasing proposed over ten years ago and still in the R&D phase Intends to bring hidden assets and liabilities on balance sheet Balance sheet recognition of lease rights and obligations. Right to use is an asset and related lease obligation is a liability to be recognized Intends to simplify lease accounting (single methodology) Eliminates differences between operating and capital lease accounting treatment Causes all material leases to be capitalized

10 Future Changes to Lease Accounting On 2/27/06 FASB & IASB issued a memorandum of understanding regarding convergence Leasing topic listed as being researched but not on active agenda Expected progress by 2008: to have considered and made a decision about the scope and timing of a potential agenda project Impact to Lessee: loss of operating lease/off-balance sheet treatment Impact to Lessor All material leases are direct financing leases: consistent income recognition pattern Potential elimination of leveraged lease accounting

11 Contact Information Deborah Brady SVP, Pricing & Economics Key Equipment Finance

12 Federal Government Relations Update David Fenig VP for Federal Government Relations Equipment Leasing Association Ponte Vedra Beach, Florida April 11, 2006

13 KEY ISSUES Budget/ Tax Legislation Tax Reform Financial Services

14 ELA S Policy Objectives Maintain tax neutrality between the lease or buy decision Maintain lessor as owner of property for tax purposes Support a tax code that incents investment and encourages capital formation Ensure the availability of leasing capital and maximum flexibility of financing options for asset acquisitions and business expansion

15 ELA Initiatives Capital formation incentives/ depreciation/ expensing Mid-Quarter depreciation convention repeal (S. 2100) Change in class life of medical equipment to facilitate medical equipment leases to tax-exempt entities

16 Budget/ Tax Legislation FY 2006 Budget Reconciliation (S. 2020/ H.R. 4297) Strikes FTA grandfather transition from JOBS Act (Senate) Retroactive application of Section 470 to foreign leases (Senate) Codification of economic substance doctrine (Senate) Hurricane Relief (P.L ) Bonus depreciation / expensing for Gulf Opportunity or GO Zone Active trade or business physical requirement constrains ability of leasing companies to claim the tax benefits in the region

17 Tax Reform Bipartisan Presidential Advisory Commission Simplified Income Tax Plan Expensing for small businesses/ simplified depreciation system for medium sized businesses Growth and Investment Tax Plan capital investment expensed no deduction for interest expenses except financial institutions ELA Comments Congressional Action House Ways and Means hearings

18 Financial Services Issues PATRIOT Act/ money laundering regulations for loan and finance companies Sarbanes-Oxley Act (P.L ) regulations/ Section 404 internal controls/ proposed exemptive relief for small cap & micro cap companies

19 Save the Date! ELA s Capitol Connections 2006 May 9-10, 2006 The Mandarin Oriental Hotel Washington, D.C. Major grassroots and advocacy program with Members of Congress and key executive agencies

20 Contact Information David Fenig VP Federal Government Relations