MOMENTUM BUILDS FOR CORPORATE-TAX OVERHAUL

The White House and congressional Republicans are moving from different directions toward a consensus that the U.S. corporate tax code needs a fundamental overhaul, a goal high on corporate leaders' agenda.

Specific proposals for retooling the complex corporate-tax system aren't on the table and the debate over the issue is sure to be lengthy and difficult. But President Barack Obama and Republican congressional leaders are separately sounding the same broad theme that corporate tax rates should be lower.

The movement on the corporate-tax issue comes as Mr. Obama and his aides are pushing a broad effort to repair relations with U.S. business leaders. Since Democrats lost control of the House in November, Mr. Obama has met with chief executives to solicit their ideas on job growth, negotiated a free-trade pact with South Korea widely supported by business, and begun searching for figures with strong ties to the business world to take top White House jobs.

US businesses push back on lease accounting change

Here at Mazuma Capital Corp we have been talking a lot about the new lease accounting changes scheduled to be put into effect in 2011.  As a lease originator the big question is how detrimental will this change be on an already wounded economy and struggling industry?  Changes to off balance sheet accounting have been a topic of discussion for quite sometime, but many feel this is the wrong time to implement. The change could ultimately triple debt limits in loan agreements for some companies.

We hear that things are looking up and companies are beginning to hire, yet those in the trenches feel otherwise.  So what will happen to all of the U.S. businesses who currently have significant leases off the books? Is it a possibility for profitable companies to tank overnight due to this change?

It seems that business groups are gearing up to delay proposed accounting rules that would bring hundreds of billions of dollars in leases onto corporate balance sheets, even as backers say the revisions will give investors crucial information. Many companies - with the help of the leasing industry - have avoided putting leases on the books by structuring them to fall below the 90 percent threshold. Such leases are considered operating leases and only require a rental expense on the income statement.

At issue are rules proposed by U.S. and international standard setters. The changes are meant to address complaints that investors are not getting a complete picture of companies' debt because massive lease obligations are relegated to footnotes in financial statements. The changes could cause companies to avoid leases entirely.  The changes will be more complex, forcing many businesses to do things that hinder growth and development.

The lease accounting changes will take a few years to fully take effect, but there will be causalities. What will this mean for the leasing industry that have assisted in growth and profitability for U.S. businesses? The S & P reports that there is at least $549 Billion in lease liabilities lurking off balance sheets. That's $549 Billion that will be off the books one day and on the books the next day.  Here is a little information on what we can expect from businesses that currently use leases from Delta Airlines to McDonald’s.

Financial statements would change significantly at airlines, which lease many of their aircraft rather than owning them. Delta Air Lines, which had about $17 billion in long-term debt at year-end 2009, would see that number jump by roughly $8 billion.

McDonald's Corp, which leases about 14,000 restaurant locations and is a lessor for another 19,000, may have to spend as much as $100 million because of technology and staff resources required for the accounting change, the company said in a letter to rule-makers last month.

The new standards are a joint project of the Financial Accounting Standards Board, which sets U.S. accounting rules, and the International Accounting Standards Board, which sets international standards. The boards are holding public meetings through Jan. 6 before crafting a final rule.

Sources:

S& P

Reuters Business

2011 Looking Bright For U.S. Company Growth and Purchases

Companies are looking to expand and that means new equipment purchases in the near future.  This outlook is bright coming off of two tough years in the equipment leasing industry.  Slow growth combined with economic uncertainty was not a good combination for the leasing industry.  There seems to be a bright light at the end of this tunnel. Forecasts seem promising and the tax benefits for companies to buy are enticing.

Investment by U.S. companies in equipment and software in the third quarter was up 15% from a year earlier to $1.08 trillion, nearly matching prerecession levels, government data show.
Corporations received more incentives to invest Dec. 17, when President Obama signed into law a tax compromise reached by Congress that, among other things, lets companies deduct from taxable income 100% of certain types of investments in 2011.

It seems that big U.S. companies have cleaned up their balance sheets and, appear to be flush with cash.  These U.S. companies are open to using the cash in 2011 on factories, stores and even hiring. Companies worked hard the last few years and especially in 2010 to preserve cash, and are slowly coming around to spending it.  According to Bloomberg Business U.S. companies are turning around and starting to feel comfortable with the economic outlook.

The maker of specialty glass and ceramics is investing $300 million to expand its research and development center near its headquarters in Corning, N.Y., adding about 100 researchers and Ph.D.s. It also is spending $800 million on a liquid-crystal display factory in China and building more LCD capacity in Taiwan.

Engine maker Cummins Inc., meantime, plans to add about 2,500 U.S. jobs in 2011, many requiring engineering or other technical skills. In 2010, Cummins raised its U.S. employment by only 185 people. The company has about 14,800 U.S. employees.

At the end of the third quarter, cash held by 419 nonfinancial companies in the Standard & Poor's 500 list was up 49% from three years ago—before the start of the recession—while total debt was up a more modest 14%, according to an analysis by The Wall Street Journal.
The good news: The improvement in just the past year was even more pronounced: cash was up 10.6% from the 2009 level, while debt grew 2%.

Profits are higher, too, after companies slashed their work forces and closed less-efficient operations. Total U.S. corporate profits in 2010's third quarter rose 26% from a year earlier to $1.64 trillion, the highest in four years, according to government data.

With this stronger foundation, coupled with new confidence about the global economy, corporations are looking to expand.  Continued growth in the mining and energy businesses around the world is expected to fuel a wide range of U.S. companies. IT spending seems to be on everyones mind and will head up the priority spending list this new year.

Source:

Standard & Poors Capital IQ

Bloomberg Business

Wall Street Journal