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| Originally Posted by GUNIT1 Being in finance, you can surely explain this to me. Why is there no IPO on the market for them? Ah yes they tried, but they could not meet the guidelines set for by the GAAP (I am sure you know what that is). The depreciation of 2% on vehicles far exceeds the GAAP of 1.5%. Their questionable accounting practices led to the firing of their CFO (because he questioned ERAC's accounting methods). Interesting how most branches make money off flip. That is because they have the branch absorb too much depreciation and cause a false profit when the vehicle is sold. It is kind of like buying shirt, wearing it a day, saying it is only worth half its value and then reselling it at 3/4 original value and calling that a profit. It is not a profit. It is unethical and most likely illegal. Hence, no IPO for ERAC. |
Although GAAP (Generally Accepted Accounting Principles) has more to deal with accounting majors than finance majors I will try to answer your question the best that I can. I know that there are several different types of depreciation methods such as straight line and accelerated depreciation just to name two. The only GAAP rule that I am aware of allows a vehicle to depreciate over the course of five years. What I do know is that Enterprise is not doing anything illegal. Enterprise does have an accelerated depreciation method when it comes to depreciation of their cars that when they sell the cars the salvage value is higher than the book value. When Enterprise does their taxes they must recognize these gains though. For example, if they have a vehicle that sells for 20,000 and Enterprise has done accelerated depreciation methods to where the book value is 15,000. Not only does Enterprise get taxed from the 20,000 (at a tax rate of 40% would come out to 8,000) but they also get taxed on the difference of the salvage value and book value (5,000 x 40% = 2,000). Combined Enterprise would pay 10,000 in taxes alone on the sale of this car this car. Granted, if you used a depreciation method that was more accurate you would not pay any taxes on gains made from selling the vehicle but during the life of the vehicle you would have. The result in the end is still the same. Enterprise still pays the same in taxes, the governement could care less how you depreciate your asset they are still getting the same amount, whether you want to pay upfront or later is up to you. Depreciating an asset this way obviously shows better numbers when it comes to profits and allows Enterprise to keep that money for a little while which could potentially earn interest. A perfect analogy would be when people fill out their W-2 statements, a person may put one dependent on their W-2 even though they are single and have no true dependents. Up front they get to keep more money when they get their pay checks as oppose to if they had not recognized any dependents. However when they do their taxes the person that filed 0 exemptions will be paying less than the person that put 1 dependent when they didn't have any dependents. The effective result is the same with both people paying the same amount in taxes. It all comes down to whether you want to pay more now or later.
With regards to why Enterprise is private as opposed to being public has more to do with the raising of capital. Corporations go public simply to raise capital at a cheaper cost than by borrowing money. Right now, as far as I know, Enterprise doesn't need to get more capital for business. They are not in a position right now where they need to get capital quickly. Do I think Enterprise will go public in the future? Sure. Essentially all Enterprise has to do is modify their computer program to base depreciation from 1.5% instead of 2% assuming what you are saying is true that the depreciation method they are using is what is holding them back. I do know that one of the GAAP rules when it comes to depreciation is that an asset must be keep for at least one year. You know as well as I that Enterprise doesn't keep most of their vehicles for longer than one year. In that case Enterprise wouldn't have the tax advantage of depreciating their assets thus paying more in the way in taxes at the end of the year. Its not just Enterprise, you know that all other rental car companies are public as of to date. The only reason why Hertz is going public is due to Ford being in some financial trouble and they are trying to raise capital quickly due to their junk bond status by S&P. By selling off the company and getting capital they will ask for a re-evaluation by S&P showing that they have enough capital to cover debt so they can get away from their junk bond status. I hope I was able to answer your question.