9. Correspondence between CNA Nuclear Leasing, Inc. and Senate Small Business Committee (a) Letter dated Jan. 24, 1972, from Alvin Zises, chairman of the board, CNA Nuclear Leasing, Inc., to Senator Bible, Chairman, Senate Small Business Committee I am taking the privilege of bringing to your attention, through This threat concerns a proposal by some members of the Accounting 1. Raise the cost of electric power to the public by an 2. Increase the cost to industry, and eventually to the 3. Raise the cost of freight transportation to industry, 4. Reduce the inventory of railroad cars, locomotives, 6. Inhibit the revitalization of the aerospace and 7. Raise the costs of manufactured goods and services 8. Prevent many small and growing businesses from acquiring 9. Restrict the modernization of our merchant marine fleet; 10. Negatively affect our present adverse international balance Page Two The particular change to which the enclosed memorandum addresses itself is in regard to Accounting Principles Board Opinion No. 5 which change would require a business to capitalize leases as indebtedness in its financial reports. Lease commitments are now normally fully disclosed through detailed footnotes and supporting schedules. Despite the fact that Congress had determined that a lease is an executory contract having different characteristics and economic consequences from indebtedness, some accountants would establish accounting rules that would impute debt characteristics to low-cost net leases which Congress has explicitly sanctioned as leases. The proposed accounting rule would have damaging effects upon industry and the public. For the protection of the public Congress has intervened previously when some accountants on the Accounting Principles Board had sought to establish rules that would oppose the Congressional determination. In the Revenue Act of 1971, Section 101 (c), Congress explicitly prevented these accountants from obligating industry to report the benefits of the investment tax credit in a manner that may have thwarted the intent of Congress. The American Association of Railroads, the Edison Electric Institute, the Air Transport Association of America and the Financial Executives Institute (respective industry associations for the railroads, electric utilities, airlines and corporate financial officers) all have registered strong opposition to the proposal to capitalize leases. For the purpose of learning the consequences of this proposed accounting change, in regard to Accounting Principles Board Opinion No. 5, may we urge you to write to Richard C. Lytle, Administrative Director, Accounting Principles Board, American Institute of Certified Public Accountants, 666 Fifth Avenue, New York, New York 10019. Please request copies of the position papers of these industry associations. We thank you for your consideration of this matter. [Enclosure: Memorandum dated Jan. 20, 1972, "Capitalization of leases is detrimental to the public; would raise power and transportation rates; harm small business; and adversely affect American competitive strength in world trade"] CAPITALIZATION OF LEASES IS DETRIMENTAL TO THE PUBLIC; The Problem The Accounting Principles Board is a self-appointed and self-perpetuating group who have established themselves as the sole authoritative rule making body of the accounting profession. Some on this Board are seeking to capitalize lease commitments within the balance sheet. They would put some arbitrary and contrived number on the balance sheet that would have no relationship to the legal liability of the lessee. The capitalization method of reporting such commitments will be misleading because it will impute securities- and debt-characteristics to an executory contract of lease. (The present method of reporting leases and other executory contracts is accomplished through detailed footnotes and supporting schedules.) If capitalization of lease commitments becomes an accounting principle, the financial and credit markets will then insist that additional equity capital the highest-cost type of capital in its effect upon prices of goods and services be issued by the lessee to balance the newly imputed indebtedness. The damage to industry, shareholders, consumers, the public and the competitive posture of American industry will be enormous. The capitalization of leases would hurt the credit standings of American businesses and their ability to finance, because capitalization may add literally hundreds of millions of dollars to the liabilities within the balance sheets of some companies. Full and fair disclosure of leases, as well as other executory contracts, is both desirable and necessary. However, the form of such disclosure should be fair to the public and not misleading to investors. in those qualities. Capitalization of leases is deficient Page 2 Leasing Enables Industry to Modernize, Cut Costs, Reduce Inflation Leasing Leasing is in the public interest because leasing reduces capital costs of industry and, consequently, the cost of goods and services to the public. provides long-term capital in a capital-hungry economy at a cost that is often measurably less than a company's composite cost of capital. If a company owned (as distinguished from leasing) certain machinery and equipment, the interest return of the debt portion of that company's capitalization is deductible for tax purposes, but the return upon that company's equity is not fixed but subject to the vagaries of risk capital and also incurs an income tax requirement. capital, because it is risk capital and incurs income tax requirements, is the highest-cost form of capital. On the other hand, the rental expense in a lease is generally deductible in the year incurred. Leasing Enhances Capital Availability to United States Industry Equity Financial experts believe that the capital needs of United States industry in the future will be huge. Electrical World magazine projects electric utility capital needs to be $418 billion, adjusted for inflation, during the period 1971-1985. petroleum industry alone is estimated to need $365 billion during the 1970's. The Leasing is an added source of capital at attractive rates for industry. Capitalization of leases would destroy this needed source of low-cost capital for American business. Economic Benefits of Net (Finance) Leasing of Tangible Personal Property to the Public and Business The Revenue Act of 1971 was designed to "put our present lagging economy on the high-growth path; increase the number of jobs and diminish the high unemployment rate; relieve the hardships imposed by inflation...; aid in the modernization Page 3 of our productive facilities; increase our exports and improve our balance of payments." (Report of Senate Committee on Finance) Leasing as a financial tool for industry accomplishes these same purposes: 1. Reduces the cost of electric power. 2. Enables industry to more economically acquire pollution control equipment and thus reduces the cost of pollution control to the public. 3. Reduces the cost of rail freight to industry, agriculture and ultimately to the public. 4. Increases the supply of freight cars, thus aiding railroads, industry and agriculture. 6. Augments the supply of executive and commercial aircraft for use by business and the public. 7. Strengthens the aircraft and aerospace industry and thus aids employment in many distressed areas. 8. Increases the supply of commercial motor vehicles and thus aids the motor vehicle industry to increase jobs. 9. Enhances the availability to small business of machinery and equipment according to Study of the Federal Reserve Bank of Boston. 10. Increases the inventory of modern cost-cutting machinery for American industry. 11. Helps modernize our merchant marine fleet. 12. Strengthens America's competitive position in world markets. 13. Helps to better our presently unfavorable balance of international trade. |