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Apples and Oranges: Letter to ELFA Members

February 27, 2002

Dear ELFA Member,

In response to recent actions and statements by the SEC and FASB in reference to off-balance sheet accounting, the use of special purpose entities (SPEs), and synthetic leasing, ELFA has prepared talking points and a white paper on "Financial Accounting for Equipment Leases." These talking points and white paper (available for download in PDF format) were prepared especially for you, as an ELFA member, to use in communicating with your investors, parent companies, and customers.

The white paper covers basic information on lease accounting, SPEs, synthetic leases, and features a special resource section contrasting Enron's use of SPEs and the use of SPEs in leasing.

Some basic talking points to keep in mind when talking with your investors, parent companies, and customers:

1. Lease Accounting

• Financial accounting for leases is not new. FAS 13 has been in place as GAAP for 25 years.
• Financial accounting for leases is transparent. Capitalized or off-balance sheet, US GAAP requires that lease obligations must be disclosed.
• Equipment leases represent real assets. Whether capitalized by the lessee or not, equipment leases represent tangible assets.

2. The primary purpose of SPEs, are to

• Facilitate financing.
• Reduce costs through tax benefits.
• Protect the interests of lenders, investors, and consumers.

3. Synthetic Leases

• Primarily used in real estate transactions, are the lowest cost operating leases available.
• Give companies long-term use of business assets.
• Provide 100% financing, whereas most real estate financing advances significantly less.

4. Enron's use of SPEs vs. leasing

• Enron failed to comply with the accounting rules for consolidation of entities, income on sales recognition and disclosure when it used SPEs.
• Enron did not disclose the existence of the SPEs, nor did they consolidate them.

The white paper closes with the US GAAP operating lease footnote disclosure requirements for lessees.

Other useful resources available to you as an ELFA member:

• ELFA's Accounting Committee wrote the article "Accounting Changes: What's Happening Now and Where are We Going" (Feb. 27, 2002)
• ELFA's Accounting Committee wrote "Enron Accounting vs. Lease Accounting: Apples to Oranges," an article that will appear in March 2002's ELT.
• You'll also want to read "The Nature and Business Purpose of Special Purpose Entities" which was originally published in January 2002's ELT.
• A new table, based on ELFA Survey of Industry Activity data, in the Industry Data section of ELFA Online shows just how small a percentage of lessees default on leases. Lease Defaults 1993-2000

ELFA continues to monitor news articles in the media and educate journalists about lease accounting through interviews.

ELFA's Accounting and Federal Tax Committees continue to closely monitor Congressional and SEC/FASB developments, as there are several proposals that may have consequences for various equipment leasing and finance products. ELFA is scheduled to meet with FASB in early May and is preparing to address these issues.

Sincerely,

Amy J. Miller Holmes
Vice President, Communications
Equipment Leasing Association