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As Uncertainty Swells, ELFA Focuses Efforts on Key Areas of Concern

Date: Sep 04, 2012 @ 07:00 AM

During the past few years, the equipment finance industry has demonstrated its resiliency and ability to recover from the darkness of the recession. The industry as a whole has posted new business volume growth despite facing considerable headwinds and a continual barrage of negative or, at minimum, lackluster economic reports. And despite the challenges facing the industry and business of all sizes in the U.S., the economy is growing, albeit slowly, and businesses are once again expending capital on equipment acquisitions.
 
This growth in capital expenditures was recently supported in the July Monthly Leasing and Finance Index (MLFI-25) released by the Equipment Leasing and Finance Association (ELFA) which demonstrated overall new business volume of $6.6 billion, an improvement of 15.8% from the new business volume in the same period of 2011. Additionally, the report stated year-to-date cumulative new business volume increased 14.7% versus the same period in 2011.

However, despite this growth in new business volume, confidence remains unbalanced for the leaders of equipment finance companies. In a separate report released by the Equipment Leasing & Finance Foundation (Foundation), the Monthly Confidence Index (MCI-EFI) for August was 50.2; down from the July index of 51.5, which according to the Foundation reflects ongoing industry concerns over economic, regulatory and political uncertainty.

The Foundation also provided a cautiously optimistic view of the future when it issued its quarterly update to its 2012 Equipment Leasing & Finance U.S. Economic Outlook for the third quarter. In this report, the Foundation said growth in equipment and software investment for 2012 had slowed to 6.4%, down from the previous projection of 6.9%, but the report also stated the Foundation was cautiously optimistic that growth will pick up in the second half of 2012 and into 2013 based upon a review of forward-looking indicators.
 
These certainly are interesting times in the equipment finance industry. But for those in the trenches, these remain frustrating times. Times that are fraught with risk tied to geopolitical uncertainty, a tenuous global economy, and a feeling of general malaise in Washington to address the issues faced by small, mid-sized and large businesses. As one of our readers said in a post to a recent news item, “So new business volume is up and confidence is down, what else is new? The question is, what are we as an industry doing to turn this ship around?”
 
To gain an understanding of the issues facing the equipment finance industry, we asked William G. (Woody) Sutton, CAE, President and Chief Executive Officer of the ELFA, to provide our readers his general thoughts on the three most important issues facing the equipment finance industry for the remainder of 2012 and into 2013.

According to Sutton, the three biggest concerns for 2012 and for the next year are: lease accounting, economic uncertainty - and going out a few years – comprehensive tax reform.

Lease Accounting

According to Sutton, lease accounting has been and remains the biggest issue for the industry and the ELFA is working diligently to address the issue. “When the first exposure draft was issued, we worked with the coalition here in Washington of the U.S. Chamber of Commerce, the Real Estate Roundtable, and with our members within a task force of our Board of Directors and our Lease Accounting Committee to make a major push on this issue, which precipitated over 800 comment letters on the first exposure draft. Our members and their customers provided information and participated in all the roundtables and meetings held by the FASB and IASB. So we have remained closely engaged in this project,” explains Sutton.

As a result of this outreach and the number of comment letters received, both the FASB and IASB have engaged in discussions with the ELFA regarding all the outstanding lease accounting issues says Sutton. But the biggest issue still outstanding is the problematic front-end loading of rent expense. In regards to this issue Sutton added, “We are now in a period of continuing deliberations among the FASB and the IASB. They are continuing to have meetings about this issue and are conducting research with plans to release a revised Exposure Draft by the end of 2012.”

The ELFA is encouraging member companies with a stake in equipment leasing to comment to the FASB and IASB upon release of the Exposure Draft. “Leases account for hundreds of billions of dollars in transactions annually, contributing not only to businesses’ success, but also to U.S. economic growth, manufacturing and jobs,” says Sutton. “It is essential that the boards carefully consider comprehensive public input and comment before finalizing their proposal to ensure a workable lease accounting standard.”

Nothing moves too quickly in this process as we have learned in recent years, and the ELFA will remain engaged in the project once the new 120-day comment period has elapsed after the newest Exposure Draft is written. “In the meantime, we are continuing to work with the two boards’ staffs and continuing to provide unsolicited comment letters addressing the issue of front-end loading of rent expense,” says Sutton. “The FASB and IASB have agreed that there are really two types of leases, but the devil is in the details.”

Sutton also describes the relationship between the FASB, IASB and ELFA as “very professional,” noting the two boards welcome the participation of the ELFA in the project. “They value our input and we’ve been working closely with them for many years,” said Sutton.

He also offered a clarification on the difference between the standard-setting process and the regulatory process, saying, “In the regulatory process, the regulators are the various agencies of the federal government that are acting on laws that are governed by a more ‘political approach.’ In the standard setting world, it’s more consensus and industry based, and so the standard setters actively seek input from industry, and as a result the FASB has always valued our input. For over 10 years now, we have been participating with them on this project and over the past several years – we have been participating on this project almost on a daily basis.”

But the timeline for any changes to take effect is still off a few years. According to the process currently in place, there will be a comment period after the issuance of the Revised Exposure Draft, followed by a period of deliberation.

As a result, we’re not likely to see a final rule until late 2013 or early 2014, which means the implementation date will likely be pushed out to around 2017, notes Sutton.

Readers can review a running commentary on the lease accounting project on the ELFA web site.

Economic Uncertainty

Sutton summarized the issue of economic uncertainty as, “Economic uncertainty impacts confidence, which impacts GDP, which impacts companies being willing to expand, which impacts investment, which puts money on the sidelines and creates a dampening factor on expansion.”

According to Sutton, the ELFA sees four big issues that are causing economic uncertainty and this inevitable chain of events. 

  • Uncertainty within the Eurozone – hanging a cloud over the overall investment world
  • Volatility in the Middle-East – adding significantly to the geopolitical uncertainty and ties directly to the price of oil
  • The regulatory environment – encompassing issues such as Basel III, Dodd-Frank and stress tests which all exacerbate the cost of capital
  • 2012 election year issues – meaning, pending tax changes

On the last item – election year issues, Sutton adds, “This is an election year and we are also approaching the expiration of many tax benefits.  So the potential of a major tax increase on January 1, 2013 – unless the policy makers can decide on some sort of compromise – creates a massive amount of uncertainty. These four major issues are placing a cloud over business confidence and you must have confidence in order to stimulate growth.”

In the face of this uncertainty, the association is maintaining a proactive policy agenda and ramping up its grassroots mobilization program, says Sutton. "As the equipment leasing and finance industry's principal advocate, ELFA is actively engaged in defending the industry at the state and federal levels against harmful laws and regulations and fighting to preserve the tax, financial and business principles that underlie equipment leasing and finance.”

Comprehensive Tax Reform

The nation is facing what is commonly called “taxmageddon” according to Sutton – the expiration of the Bush era tax cuts, the potential expiration of many tax benefits, increases in taxes due to the Healthcare Affordability Act and the potential increase in taxes if the tax extenders are not implemented. “All these pieces of tax legislation expire on December 31, 2012, so effective January 1, 2013 you have a potential taxmageddon if Congress doesn’t act,” says Sutton.

However, there is some positive news in this regard. Sutton says work on these issues has already begun in Washington and the ELFA has been and will continue to be engaged on this issue of comprehensive tax reform. He adds ELFA supports items in the tax code that support investment in productive assets – which is the overarching position of the ELFA in regards to all tax issues. “It’s our position that lawmakers in Washington should continue on with the tax extenders and have some thoughtful discussion in 2013 about comprehensive tax reform.”

Sutton also believes there are several proposals related to the tax extensions and other tax issues from the Senate and House that the democratic Senate and republican House don’t agree upon, but that these issues will likely be worked through successfully.

Sutton explains, “The things we must look at in the broader context of tax reform is focusing our advocacy efforts on the Hill to support broad tax reform that supports investment in productive assets and also ensures the maximum level of flexibility in financing options for various businesses. And that it also provides neutrality and equality in application to the lessor and the lessee, while not changing those deductions that keep the cost of capital down and incentivizes investment to create economic and job growth.”

The ELFA is focusing its tax advocacy efforts on four committees in Washington – the House Ways and Means Committee, the Senate Finance Committee, the House Financial Services Committee and the Senate Banking Committee. Sutton concludes, “Those four committees are the focus of our advocacy efforts and the association is continually outlining the reasons to maintain the types of incentives that enhance capital equipment acquisition, NOT dampen the enthusiasm for capital equipment expansion. We do feel there are members from both sides of the aisle that understand this issue and we don’t want to stifle or limit the small, mid-sized and large companies’ ability to acquire capital equipment.”

Although the economy faces many challenges, Sutton is optimistic for the future based on his experience with the equipment leasing and finance industry so far. "An active and innovative industry such as ours, with an effective and forward-looking association of dedicated volunteers can do wonders."

 

William G. Sutton, CAE, serves as President and CEO of the Equipment Leasing and Finance Association (ELFA), the premier trade association representing more than 550 member organizations in the $628 billion equipment finance sector. Sutton leads the organization in its missions to foster business development, provide industry research and analysis, and deliver educational opportunities through conferences, webinars and meetings.  He oversees the advocacy efforts on behalf of the organization and the industry. As President of the Equipment Leasing and Finance Foundation (ELFF), he coordinates forward-looking research, the primary mission of the ELFF.

Immediately prior to the ELFA, Sutton served as interim president and chief executive officer of the Association, Education and Business Institute, Inc., in Arlington, VA. A former U.S. Navy Rear Admiral with 30 years' military service, Sutton previously served as Assistant Secretary of Manufacturing and Services, a unit of the U.S. Department of Commerce's International Trade Administration. Appointed by President George W. Bush, Sutton was unanimously confirmed by the Senate.

Sutton joined the Commerce Department after serving for five years as president of the Air Conditioning and Refrigeration Institute (ARI), an association that represents manufacturers of more than 90 percent of North American-produced central air conditioning and commercial refrigeration equipment. During his ARI tenure, Sutton served as an officer of the National Association of Manufacturers' Council of Manufacturing Associations, and he served on the Boards of Directors for the American National Standards Institute (ANSI), North American Technician Excellence (NATE), the Air Conditioning and Refrigeration Technology Institute (ARTI), and the Clifford H. "Ted" Rees Scholarship Foundation.

During his time in the U.S. Navy, Sutton served as Naval Aide to President Ronald Reagan and Director of Programs in the Navy Office of Legislative Affairs, in addition to numerous operational at-sea assignments, including ship, squadron and group commands.

Sutton attained the Certified Association Executive (CAE) credential in 2007 through the American Society of Association Executives. He is also an active member of the U.S. Chamber of Commerce's Committee of 100.

Sutton holds an M.S. in Naval Architecture and Marine Engineering from the Massachusetts Institute of Technology and a B.S. in Naval Engineering from the United States Naval Academy.

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Founder / Publisher / Chief Executive Officer | Equipment Finance Advisor
Michael Toglia is the Founder, Publisher and President of Equipment Finance Advisor.

Toglia's experience in commercial finance spans over 25 years having held various roles in senior management, business origination, capital markets and commercial credit underwriting. Prior to entering the publishing industry, Toglia most recently served as a Vice President of Capital Markets and as the National Sales Manager for both the Equipment Finance and Asset-Based Lending Divisions of Textron Financial Corporation. He has also held various roles with General Electric Capital and CIT Group.

He has been an active member of the Equipment Leasing and Finance Association having served two terms as a member of the Service Providers Business Council Steering Committee.

Toglia holds a Bachelor’s Degree in Accounting and an M.B.A. in Finance.

Contact Michael Toglia at 484.380.3184 or mtoglia@equipmentfa.com.


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