RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2019

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Cloud Computing Arrangements

In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends Accounting Standards Codification (ASC) 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. ASU 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Entities are permitted to apply either a retrospective or prospective approach to adopt the guidance. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.

Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815). This pronouncement, along with ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments issued to clarify certain provisions of these ASUs, simplifies and clarifies the accounting and disclosure for hedging activities by more closely aligning the results of cash flow and fair value hedge accounting with the risk management activities of an entity. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted.

We adopted this standard during the first quarter of 2019 and it did not impact our consolidated financial position, results of operations, or cash flows.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, modifies the measurement of expected credit losses of certain financial instruments, including our accounts receivable and net investments in sales-type leases. Among other things, these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The standard requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. Periods prior to the adoption date that are presented for comparative purposes are not adjusted. We are currently evaluating the impact of the adoption of this update on our consolidated financial position, results of operations, and cash flows.

Leases

In February 2016, the FASB issued Topic 842, which sets out the principles for the identification, measurement, recognition, presentation and disclosure of leases. The FASB issued a number of subsequent updates to the standard. Topic 842 impacts the accounting for both lessors and lessees. We have adopted the standard effective January 1, 2019, using the modified retrospective transition method and initial application date of January 1, 2017. For all our facilities and equipment that we lease, we have elected the practical expedient to combine lease and non-lease components. For our existing operating and finance leases that commenced before the date of initial application where we are the lessee, we have made an accounting policy election to use the incremental borrowing rate for our leases considering the remaining lease term and remaining minimum rental payments. After lease commencement of our operating leases where we are the lessee, unless the ROU assets are impaired, we have made an accounting policy election to subsequently measure operating lease ROU assets by amortizing the ROU assets, calculated as the difference between the straight line cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability using the effective interest method. In calculating the change in ROU assets from a lease modification that decreases our rights as lessee to use one or more underlying assets, we have made an accounting policy election of remeasuring the ROU asset based on how much of the original right of use remains after modification.

The new standard requires lessors to identify and evaluate the lease and non-lease components in arrangements containing a lease, provides clarification on the scope of non-lease components and provides more guidance on how to identify and separate the components. From a lessor perspective, the adoption of the new lease standard primarily impacts our ChoiceLease product line, which includes a vehicle lease as well as maintenance and other services.

The standard requires lessees to classify leases as either finance or operating leases. This classification determines whether the related expense is recognized based on asset amortization and interest on the obligation (finance leases) or on a straight-line basis over the term of the lease (operating lease). We recorded a ROU asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. We have elected the practical expedient in Topic 842 to not apply these recognition requirements to leases with a term of 12 months or less with the exception of our real estate leases. Instead we recognize the lease payments on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

Adoption of the new lease standard impacted our previously reported Consolidated Condensed Statements of Earnings and Comprehensive Income as follows (in millions, except per share amounts):


	Three months ended September 30, 2018									Nine months ended September 30, 2018

	As Previously		Lessor	Lessee and Other		As Previously		Lessor	Lessee and Other
	Reported		Adjustments ⁽¹⁾	Adjustments ⁽¹⁾	As Revised	Reported		Adjustments ⁽¹⁾	Adjustments ⁽¹⁾	As Revised
Lease & related maintenance and rental revenues	$	895.2	1.2	0.4	896.8	$	2,577.4	2.0	1.0	2,580.4


Total revenues	2,158.1		1.2	0.4	2,159.7	6,150.9		2.0	1.0	6,153.8

Cost of lease & related maintenance and rental	649.4		(2.7)	—	646.7	1,905.0		(9.9)	—	1,895.1
Cost of services ⁽²⁾	945.9		—	2.1	947.9	2,639.1		—	5.6	2,644.8

Other operating expenses	30.3		—	(0.3)	30.0	94.8		—	(1.1)	93.7
Selling, general and administrative expenses ⁽²⁾	215.5		0.9	(0.8)	215.6	637.3		1.0	(2.2)	636.0

Used vehicle sales, net	3.0		0.2	—	3.2	16.4		(0.2)	—	16.2
Interest expense	47.4		—	0.5	47.8	127.5		—	1.2	128.8

Restructuring and other items, net ⁽²⁾	0.3		—	(0.9)	(0.5)	19.7		—	(2.4)	17.3

Earnings from continuing operations before income taxes	116.1		2.9	(0.2)	118.9	262.5		11.2	(0.2)	273.5
Provision for income taxes	26.6		0.6	—	27.3	95.6		2.8	—	98.4
Earnings from continuing operations	89.5		2.3	(0.2)	91.6	167.0		8.4	(0.2)	175.1

Net earnings	88.8		2.3	(0.2)	90.8	164.5		8.4	(0.2)	172.6

Comprehensive income	100.6		1.9	—	102.5	156.4		9.5	—	165.9

Earnings per common share - Basic
Continuing operations	$	1.70	0.04	—	1.74	$	3.18	0.15	—	3.33

Net earnings	$	1.69	0.04	—	1.73	$	3.13	0.15	—	3.28

Earnings per common share - Diluted
Continuing operations	$	1.69	0.04	—	1.73	$	3.15	0.16	—	3.31

Net earnings	$	1.68	0.04	—	1.72	$	3.11	0.16	—	3.26

————————————

(1)We determined that in a prior period certain lessor arrangements of revenue earning equipment historically accounted for as operating leases should have been accounted for as direct financing leases. Additionally, we evaluated our leases for classification and determined that certain lessee arrangements, primarily real estate leases, historically accounted for as operating leases should have been accounted for as capital leases. The prior period error was corrected by reducing "Lease & related maintenance and rental revenues" by approximately $5 million and $14 million during the three and nine months ended September 30, 2018, respectively. We also reduced depreciation expense (included in "Cost of lease & related maintenance and rental") by approximately $5 million and $14 million during the three and nine months ended September 30, 2018, respectively. We concluded these errors were not material to any of our previously issued consolidated financial statements.

(2)Adjustments primarily reflect the reclassification of our Singapore operations into "Restructuring and other items, net," that were shut down during 2019.

Note: Amounts may not be additive due to rounding.

Adoption of the new lease standard impacted our previously reported Consolidated Condensed Balance Sheet as follows (in millions):


	December 31, 2018

	As Previously	Lessor			Lessee
	Reported	Adjustments ⁽¹⁾			Adjustments ⁽¹⁾		As Revised



Receivables, net			$	1,219.4		22.6		—	1,242.1

Prepaid expenses and other current assets			201.6			(23.3)		—	178.3
Total current assets			1,568.4			(0.7)		—	1,567.7
Revenue earning equipment, net			9,498.0			(84.2)		2.2	9,416.0
Operating property and equipment, net			843.8			—		18.2	862.1


Sales-type leases and other assets			606.6			156.8		204.3	967.8
Total assets			13,051.1			72.0		224.7	13,347.8




Short-term debt and current portion of long term-debt			930.0			—		7.2	937.1

Accrued expenses and other current liabilities			630.5			145.1		72.2	847.7
Total current liabilities			2,292.3			145.1		79.3	2,516.7
Long-term debt			5,693.6			—		18.5	5,712.1
Other non-current liabilities			849.9			421.2		131.5	1,402.6
Deferred income taxes			1,304.8			(124.6)		(0.5)	1,179.7
Total liabilities			10,140.8			441.7		228.8	10,811.2





Retained earnings			2,710.7			(369.6)		(3.8)	2,337.3
Accumulated other comprehensive loss			(911.3)			(0.1)		(0.2)	(911.6)
Total shareholders' equity			2,910.3			(369.7)		(4.1)	2,536.6
Total liabilities and shareholders' equity			13,051.1			72.0		224.7	13,347.8

————————————

(1)We determined that in a prior period certain lessor arrangements of revenue earning equipment historically accounted for as operating leases should have been accounted for as direct financing leases. Additionally, we evaluated our leases for classification and determined that certain lessee arrangements, primarily real estate leases, historically accounted for as operating leases should have been accounted for as capital leases. The prior period error was corrected by increasing "Receivables, net" by approximately $24 million and also increasing sales-type leases and other assets by approximately $65 million and reducing "Revenue earning equipment, net" by approximately $83 million. We concluded these errors were not material to any of our previously issued consolidated financial statements.

Note: Amounts may not be additive due to rounding.

Adoption of the new lease standard impacted our previously reported Consolidated Condensed Statements of Cash Flows as follows (in millions):


	Nine months ended September 30, 2018
	As Previously Reported		New Lease Standard Adjustments	As Revised


Net earnings	$	164.5	8.1	172.6

Earnings from continuing operations	167.0		8.1	175.1
Depreciation expense	1,028.5		(6.5)	1,022.0

Used vehicle sales, net	16.4		(0.2)	16.2
Amortization expense and other non-cash charges, net	21.2		83.7	104.9

Deferred income tax expense	103.1		2.8	105.9
Collections on sales-type leases and other items	—		63.3	63.3
Changes in operating assets and liabilities:


Prepaid expenses and other assets	(27.2)		(77.3)	(104.5)

Accrued expenses and other non-current liabilities	(6.7)		(10.7)	(17.4)
Net cash provided by operating activities from continuing operations	1,212.4		63.2	1,275.6




Debt repaid	(466.1)		(5.6)	(471.7)




Net cash provided by financing activities from continuing operations	784.9		(5.6)	779.2






Collections on direct finance leases and other items	57.6		(57.6)	—

Net cash used in investing activities from continuing operations	(2,018.2)		(57.6)	(2,075.8)

Note: Amounts may not be additive due to rounding.