While working on a consulting engagement, a supervisor in the team has given an assignment. The client is a regional trucking company. A new customer has approached the client with an opportunity that would require 120 trailers—20 more than the trucking company currently owns. The client is uncertain how long the relationship with the customer may last, but the deal has the potential for significant growth. The supervisor has asked a research to be conducted on leases and lease structure issues on the Financial Accounting Standards Board (FASB) website, in particular the current practice and thought related to direct financing, sales type, and operating leases. This paper is a memo addressed to the supervisor that summarizes…show more content… As the deal has the potential for significant growth, five trailers could be safely brought on board under capital lease (transfer title to client at the end of the lease term of say five years). Irrespective of how long the relationship lasts these five new trailers could be a real asset to our client to boost productivity for a long time into the future, especially because trucking is their primary business. If the deal breaks midway, they could be used for other newer opportunities. The client may be encouraged to retain these new trailers and sell off the oldest ones in their fleet to maintain high standards of customer service, efficiency and productivity.
As operating leases are available under varying lease periods, our client should be advised to avail of the 48 months option for five trailers, the 36 months option for the next five trailers and the 24 months option for the remaining five trailers. This staggered plan will take care of nearly all uncertainties in this opportunity with the new customer. Depending on the volume of business flowing in from the new customer, our client will have the flexibility to honor the lease commitments or extend them as necessary. Our client will enjoy monthly savings of nearly 30%-50% over purchasing, because lease payments are based on the actual portion of usage of the trailer. They will also be able to show a better cash flow with lower