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REVENUE EARNING EQUIPMENT, NET | 9 Months Ended
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Sep. 30, 2020
Revenue Earning Equipment [Abstract] |
REVENUE EARNING EQUIPMENT, NET | REVENUE EARNING EQUIPMENT, NET
| September 30, 2020 |  | December 31, 2019
| Cost |  | Accumulated Depreciation |  | Net Book Value (1) |  | Cost |  | Accumulated Depreciation |  | Net Book Value (1)
| (In thousands)
Held for use: |
ChoiceLease | $ | 11,436,263 |  |  | $ | (4,271,752) |  |  | $ | 7,164,511 |  |  | $ | 12,223,179 |  |  | $ | (4,125,342) |  |  | $ | 8,097,837 |
Commercial rental | 2,721,200 |  |  | (981,959) |  |  | 1,739,241 |  |  | 3,200,403 |  |  | (1,049,850) |  |  | 2,150,553 |
Held for sale | 885,325 |  |  | (706,497) |  |  | 178,828 |  |  | 748,435 |  |  | (569,161) |  |  | 179,274 |
Total | $ | 15,042,788 |  |  | $ | (5,960,208) |  |  | $ | 9,082,580 |  |  | $ | 16,172,017 |  |  | $ | (5,744,353) |  |  | $ | 10,427,664 |
———————————— (1)Revenue earning equipment, net includes vehicles under finance leases of $10 million, less accumulated depreciation of $8 million, as of September 30, 2020, and $12 million, less accumulated depreciation of $8 million, as of December 31, 2019. We periodically review and adjust, as appropriate, the estimated residual values and useful lives of existing revenue earning equipment for the purposes of recording depreciation expense. Our review of the estimated residual values and useful lives of revenue earning equipment is established with a long-term view, which we refer to as "policy depreciation," and is based on vehicle class, generally subcategories of trucks, tractors and trailers by weight and usage, as well as other factors. These other factors include, but are not limited to, historical, current, and expected future market prices; expected lives of vehicles; and expected sales of used vehicles in the wholesale and retail markets. A reduction in estimated residual values or useful lives will result in an increase in depreciation expense over the remaining life of the vehicle. We also assess estimates of residual values of vehicles expected to be made available for sale in the near-term (generally 12 to 24 months) based on near-term market rates and conditions and may adjust residual values for these vehicles, which we refer to as “accelerated depreciation.” In the first half of 2020, we performed a review of the estimated residual values of our FMS revenue earning equipment for both accelerated and policy depreciation primarily due to the COVID-19 pandemic and the impact on current and expected used vehicle market conditions. We did not have any further changes to our residual value estimates in the third quarter of 2020. For the three and nine months ended September 30, 2020, we recognized policy and accelerated depreciation impacts totaling $100 million and $405 million, respectively, related to prior residual estimate changes in 2019 and 2020. The amounts included below only reflect the impacts from the estimate changes that occurred in the first and second quarters of 2020. Accelerated Depreciation In the first quarter of 2020, we revised our residual value estimates for vehicles that are expected to be sold in the near-term (through mid-2021) and recorded valuation adjustments on our vehicles held for sale due to the expected negative impacts of the COVID-19 pandemic on pricing and volume of used vehicle sales. At that time, we expected lower used vehicle pricing in the second half of 2020 due to lower demand rather than our previous expectations of a modest increase. In the second quarter of 2020, we further revised our residual value estimates to reflect an expected delayed recovery in the used vehicle market beyond mid-2021 and thus extended accelerated depreciation by an additional year to now include vehicles expected to be sold through mid-2022. As a result of these changes in estimated residual values, we recorded additional accelerated depreciation in the third quarter of 2020 of $23 million, which included net gains of $13 million for used vehicle sales results. For the nine months ended September 30, 2020, we recorded additional accelerated depreciation of $133 million, which included net losses of $17 million for used vehicle sales results. Policy Depreciation In the second quarter of 2020, as a result of the expected negative impacts on pricing and volumes related to COVID-19 and our lowered longer term outlook, we concluded that our residual value estimates likely exceeded the expected future values that would be realized upon the sale of vehicles in our fleet for vehicles expected to be sold after mid-2022. Therefore, we lowered our estimated residual values primarily for our truck fleet, and to a lesser extent, our tractor fleet, effective April 1, 2020. In evaluating our residual value estimates, we reviewed recent multi-year trends; management and third-party longer-term outlook for the used vehicle market, including impacts of COVID-19 and the demand and pricing of our used vehicles; expected sales volumes through our retail and wholesale channels; inventory levels; and other factors that management deemed necessary to appropriately reflect our expected long-term sales proceeds. In the three and nine months ended September 30, 2020, we recorded additional policy depreciation of $18 million and $36 million, respectively. Impact of Change in Estimate The changes in our residual value estimates in the first half of 2020 resulted in an increase in depreciation expense of $41 million and $169 million for the three and nine months ended September 30, 2020, respectively. This resulted in a decrease to our net earnings of $30 million and $125 million and diluted earnings per share of $0.58 and $2.39 for the three and nine months ended September 30, 2020, respectively.
Used Vehicle Sales and Valuation Adjustments Revenue earning equipment held for sale is stated at the lower of carrying amount or fair value less costs to sell. Losses on vehicles held for sale for which carrying values exceeded fair value, which we refer to as "valuation adjustments," are recognized at the time they are deemed to meet the held for sale criteria and are presented within “Used vehicle sales, net” in the Condensed Consolidated Statements of Earnings. For revenue earning equipment held for sale, we stratify our fleet by vehicle type (trucks, tractors and trailers), weight class, age and other relevant characteristics and create classes of similar assets for analysis purposes. For revenue earning equipment held for sale, fair value was determined based upon recent market prices obtained from our own sales experience for each class of similar assets and vehicle condition. In addition, we also consider expected declines in market prices when valuing the vehicles held for sale, as well as the forecasted sales channel (retail/wholesale). The following table presents our assets held for sale that are measured at fair value on a nonrecurring basis and considered a Level 3 fair value measurement:
|  |  | Total Losses (2)
|  |  | Three months ended September 30, |  | Nine months ended September 30,
| September 30, 2020 |  | December 31, 2019 |  | 2020 |  | 2019 |  | 2020 |  | 2019
| (In thousands)
Revenue earning equipment held for sale (1): |  |  |  |  |  |  |  |  |  |  |
Trucks | $ | 53,736 |  |  | $ | 39,009 |  |  | $ | 511 |  |  | $ | 10,269 |  |  | $ | 16,962 |  |  | $ | 30,556 |
Tractors | 82,593 |  |  | 73,359 |  |  | 603 |  |  | 14,430 |  |  | 12,091 |  |  | 34,451 |
Trailers | 2,480 |  |  | 2,206 |  |  | 819 |  |  | 1,195 |  |  | 5,404 |  |  | 2,859 |
Total assets at fair value | $ | 138,809 |  |  | $ | 114,574 |  |  | $ | 1,933 |  |  | $ | 25,894 |  |  | $ | 34,457 |  |  | $ | 67,866 |
———————————— (1)Assets held for sale in the table above only include the portion of revenue earning equipment held for sale where net book values exceeded fair values and fair value valuation adjustments were recorded. The net book value of assets held for sale that were less than fair value was $40 million and $65 million as of September 30, 2020 and December 31, 2019, respectively. (2)Total losses represent fair value valuation adjustments for all vehicles reclassified to held for sale throughout the period for which fair value was less than net book value. The components of used vehicle sales, net were as follows:
| Three months ended September 30, |  | Nine months ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
| (In thousands)
Losses (gains) on vehicle sales, net | $ | (14,852) |  |  | $ | (3,160) |  |  | $ | (17,204) |  |  | $ | (18,775) |
Losses from valuation adjustments | 1,933 |  |  | 25,894 |  |  | 34,457 |  |  | 67,866 |
Used vehicle sales, net | $ | (12,919) |  |  | $ | 22,734 |  |  | $ | 17,253 |  |  | $ | 49,091 |

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- Definition Revenue Earning Equipment. + References No definition available. + Details
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- Definition Disclosure of revenue earning equipment used in the normal conduct of the vehicle leasing and commercial rental business, not otherwise defined in the taxonomy. This disclosure may include accounting policies and methodology and impact of changes thereto, a schedule of revenue earning equipment cost, accumulated depreciation, net book value, useful lives, assets held for sale. In addition, this disclosure includes vehicles acquired under capital leases and accumulated amortization included within revenue earning equipment. This element may be used as a single block of text to include the entire revenue earning equipment disclosure, including data and tables. + References No definition available. + Details
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