Financial Management Flashcards

Question

Describe the RACE system

Answer 1

Recommended automobile classification expenses - standardized chargeback system to identify and track vehicle expenses.

Answer 2

assets that incur just by having the vehicle, such as depreciation, cost of money/interest, admin overhead, insurance costs, licenses and taxes

Answer 3

If I acquire a vehicle and I do nothing with it and leave it in the parking lot, any cost I incur will be a fixed cost. • If I acquire a vehicle, and I add items to it like a light bar, but then I leave it in the parking lot and do nothing with it, the cost of the light bar addition would be considered part of the capitalization of the vehicle. • If I have a vehicle that needs refurbishment, and the cost of refurbishing the vehicle is more than 50% of its value (using a guide like Kelly Blue Book or NADA), then the cost of refurbishment is considered part of a recapitalization cost. • If I have a vehicle that needs refurbishment, and the cost of the refurbishment is less than 50% of the vehicle’s value, then it can be considered an operating cost because the vehicle can still be used for its original purpose.

Answer 4

any thing or item that is consumed during the course of the vehicles life.

Answer 5

fuel and oil, tires, maintenance, parts, shop supplies, mechanic training, shop and equipment maintenance

Answer 6

repairs related to a crash should have a sep category since they are not considered "normal" costs. Refurbishments require the veh to be recapitalized so they can not be considered operating expenses

Answer 7

non operating and non fixed costs such as car washes, parking fees, toll costs, misc items like floor mats and seat covers. Not really maintenance because they do not add to the capitalized value of a vehicle. should not be included in lifecycle analysis. these costs are not related to having the vehicle in a safe and serviceable operating condition.

Answer 8

direct costs, indirect costs (includes some of fixed and incidental categories), overhead costs (also indirect costs)

Answer 9

system that links costs or groups of costs with one of more cost objectives such as products, departments, or divisions. ideally costs should be assigned to the cost objective that caused it. Cost allocation tries to identify costs with organizations via some function representing causation

Answer 10

A Cost Allocation spectrum illustrates the array of approaches available for cost allocation.

Answer 11

The cost allocation spectrum differentiates between knowing costs, allocating costs and billing for costs. Organizations who know their costs have identified cost categories and monitor these expenses. Allocation is one step further, as costs are divided according to the customer who incurs them, even though the customer is not billed. One step further along the spectrum is where costs are known, allocated and the applicable customer is billed for their share of expenses. Position A organizations do not track the costs of fleet operations. Fleets are given a central budget, pay the bills as they occur and are not overly concerned with recovering these costs from customers, or even having full knowledge of what these costs are. This might be the case for a very small fleet where the costs of tracking expenses outweigh the value gained. • Position B fleets operate in a similar fashion except that they know the majority of their costs. For a variety of reasons, they fund these costs centrally and do not allocate them to customers. • Position C fleets know their costs and allocate them to customers, but do not recover from their customers by billing. • Position D fleets know and allocate operating costs and bill customers for them. They operate a general (capital) fund for vehicle replacement. • Position E fleet departments know, allocate and bill for the majority of operating and capital costs related to fleet. • Position F fleets have a comprehensive system that tracks even incidental and all overhead costs. These are allocated or charged to customers through a variety of rates and/or surcharges

Answer 12

fund that all resources go to into if they are not required to be in another fund. when an expense is covered by the general fund, no recovery is made from customers

Answer 13

the type of organization and management goals/expectations, small, straightforward operations may benefit from the simpicity of this structure

Answer 14

fund that makes the customer depts accountable to all expenses. Distributes costs based on actual usage, forcing an equitable distribution of costs. operates like a business but the customers are other govt agencies. Internal service funds are established to account for the financing of goods and services provided by one department or unit to other departments or units of the same organization on a cost reimbursement basis. they should not generate a profit

Answer 15

graphic/printing services, communications, property management, info systems, purchasing , risk management, and fleet

Answer 16

these funds operate like a business, with the governmental entity operating as a business to outside consumers The main distinction between an internal service fund and an enterprise fund is that in the case of the latter, at least some of the customers are external. An enterprise fund is a fund used to account for revenues received for goods or services provided to users on a continuing basis and primarily financed through user charges

Answer 17

airport, ambulance, parking, solid waste, utilities, golf courses, transit, libraries

Answer 18

In conjunction with senior management, determine its position on the spectrum and its ideal position for the future Identify any impediments to moving to that ideal position Implement cost accounting processes to allow it to reach that position

Answer 19

• Behavioral – management and employee attitudes • Technical – absence of necessary cost information and lack of automation to gather and analyze it • Structural – lack of distinct business units, lines of authority, and responsibility

Answer 20

• Develop an activity dictionary • Determine how much the organization is spending on each activity • Identify the organization’s products, services and customers • Select activity cost drivers that link activity costs to the organization's products, services, and customers

Answer 21

policy setting, supplier management, fleet user advocacy, customer relationship management

Answer 22

Some companies use debt as a part of their overall corporate financial strategy. Companies may use any one or a combination of all types of debt to finance vehicle acquisitions. Some debt instruments are governed by covenants or rules that require the issuer to maintain certain financial standards, such as debt to equity ratios, and requirements to maintain minimum levels of liquidity. There may also be non-financial covenants that require the issuer to provide certain information to bondholders, or to restrict the sale of assets or changes of control. Covenants are designed to ensure that bondholders will receive their interest and principal payments on time.

Answer 23

equity securities do not ensure any payment to investors by issuer bond prices are determined by the market and are based on the issuer's credit rating, term to maturity, coupon rate, and market yield on comparable securities Stock prices are set by the market based on the expected level and value of the issuer’s current and future earnings. Bond investors are relatively certain of their expected cash flows and rate of return of both income and return of principal (if they hold to maturity). Equity investors are not assured of future income or investment return

Answer 24

secured if creditors have recourse to the assets of the company on a proprietary basis, or otherwise ahead of general claims against the company. Unsecured debt consists of financial obligations where creditors do not have recourse to the assets of the borrower to satisfy their claims.

Answer 25

Private debts are bank-loan type obligations. Public debt is a general description covering all financial instruments that are freely tradable on a public exchange or over the counter with few, if any, restrictions.

Answer 26

A basic loan or “term loan” is the simplest form of debt. It consists of an agreement to lend a fixed amount of money, called the principal sum, for a fixed period of time, with this amount to be repaid by a certain date. Interest, which is calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called bullet loans, particularly if there is only a single payment at the end – the “bullet” – without a “stream” of interest payments during the “life” of the loan. There are many ways to calculate interest but the standard method is the annual percentage rate (APR), widely used and required by regulation in the United States and the United Kingdom, though there are different forms of APR.

Answer 27

A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity. Syndication is more common with larger fleets, as some financial institutions are not willing to take the risk of lending too much capital to a single organization.

Answer 28

Bonds are debt securities issued by certain institutions and are one of the three main asset classes, along with stock and cash equivalents. Many companies, municipalities, states and foreign governments issue bonds to investors in a marketplace when they wish to borrow money for the purpose of financing a variety of projects for a defined period of time at a fixed interest rate. The principal determinants of a bond’s interest rate are credit quality and duration. A bond entitles the holder to repayment of the principal sum at the time of maturity, plus interest over the life of the investment. As such, bonds have a fixed lifetime with maturities ranging from a 90-day Treasury bill to a 30-year government bond. Corporate and municipal bonds are commonly in the three to 10-year range. At the bond’s maturity, the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity

Answer 29

While bonds are debt securities, stocks are considered as equity for the holder with ownership interest and no contractual obligation. Equity investors expect their ownership interest will increase in value along with the issuing company’s growth in revenue and profits; however, dividends paid to investors are solely at the discretion of the issuer’s management and Board of Directors. Conversely, debt issuers have a legal obligation to pay, and failure to do so would put them in default and could impact a company’s position as a going concern. Bondholders are secured creditors and are the first to be paid in the event of bankruptcy liquidation. In the event of liquidation, payment order is as follows with typically nothing left for common shareholders: • Secured Creditors (including bondholders) • Unsecured Creditors (typically bank loans) • Preferred shareholders • Common shareholders

Answer 30

subordinated debt or preferred equity instrument, often used by smaller companies, that represents a claim on a company’s assets, which is senior only to that of the common shares. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. It is often a more expensive financing source than secured debt or senior debt, involves additional risk and, in return, mezzanine debt holders require a higher return for their investment than secured or other more senior lenders.

Answer 31

• Securitization – This occurs when illiquid assets are put through a financial process to transform them into a security. An example would be Mortgage Backed Securities (MBS), which is an asset-backed security secured by a collection of mortgages. • Treasuries– A United States Treasury security is a government debt issued by the US Department of the Treasury, and comes in four types: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). • Swaps - Typically, a swap contract exchanges fixed rate obligations for a floating rate instrument in the same currency. In its simplest form, the two parties to an interest rate swap exchange their interest payment obligations (no principal changes hands) on two different kinds of debt instruments, one being a fixed interest rate, the other being a floating rate. • Certificate of Deposit (CD) – Is issued by commercial banks as a promissory note that entitles the bearer to a certain interest rate at a certain maturity date. • Interest Indices: o LIBOR – An acronym for the London InterBank Offered Rate, which is the rate that major banks in London charge to other banks to borrow from them. It is a key rate index for international borrowing. o Prime – Is based upon the Federal Funds Rate, (the rate at which banks in the United States lend money to other banks), and is a major rate that determines rates for many different loan programs and credit offerings. o Commercial Paper – Is an unsecured short-term debt instrument issued by a corporation. It is generally used to finance short-term obligations such as accounts receivables, inventories, etc., and rates are influenced based on the financial reputation of the corporation.

Answer 32

A capital lease is classified and accounted for by the lessee as a purchase and by the lessor as a sale or financing transaction. Answering “yes” to any one of the categorization questions requires that the lease be capitalized and recorded on the balance sheet. If all four questions can be answered “no,” the lease is considered to be an operating lease and lease payments are expensed. Capital leases do not include maintenance and cannot be cancelled. They must be capitalized and the leased assets shown on the lessee’s balance sheet. A capital lease may also be known as a finance lease or direct lease. Unless a leasing transaction is a true Capital Lease, the lessee does not retain the rights to tax depreciation. The Lessee is also responsible for vehicle maintenance and insurance

Answer 33

A contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration. Guidance will not be provided in the leases standard for distinguishing a lease of an underlying asset from a purchase or a sale of an underlying asset. Such guidance will likely arise in connection with the newly proposed Revenue Recognition standard. If an arrangement does not contain a lease, it should be accounted for in accordance with other applicable standards (for example, property, plant, and equipment and loan accounting).

Answer 34

• Does the ownership (title) transfer at the end of the lease? • Does the lease contain an option to purchase the asset at a bargain price? • Is the term of the lease at least 75% of the estimated economic life of the asset? • Is the present value of the future minimum lease payments at least 90% of the fair market value of the asset? Answering “yes” to any one of the above questions requires that the lease be capitalized and recorded on the balance sheet. If all four questions can be answered “no,” the lease is considered to be an operating lease and lease payments are expensed.

Answer 35

Finance leases are full-payout, non-cancellable agreements in which the lessee is responsible for vehicle maintenance, taxes and insurance. Sometimes referred to as a “lease-purchase,” the financial lease is most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment’s residual value to be high. Direct Financing Lease (Direct Lease) – A non-leveraged lease by a lessor in which the lease meets any of the defined criteria of a capital lease, plus certain additional criteria. A direct lease is a financial arrangement and contract through which the lessor (a financial institution, a leasing company or similar entity other than a manufacturer or dealer) agrees to furnish, and the lessee agrees to hold assets for a set period of time, at an agreed upon price, and in accordance with specified terms and conditions.

Answer 36

Under an operating lease, the leased asset is not considered an asset of the lessee; the lessee records the asset as an operating expense., lease payments are expensed. Operating leases are further defined by the assumption of the risk associated with the residual value in the leasing equation, either by the lessor or the lessee. The broader operating lease categories are identified as either closed-end or open-end, determined by whom assumes the risk for the asset, lessor or lessee. The owner (lessor) bears the risk in a closed-end lease and the borrower (lessee) bears the risk of the residual value in an open-end lease. In either case, the owner receives payment for the use of an asset for a pre-determined time period after which the asset is returned to the owner.

Answer 37

An operating lease is particularly attractive to organizations that continually update or replace equipment, want to use equipment without ownership and want to return equipment at lease-end to avoid technological obsolescence. An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints. Include cancellation clauses and may or may not include maintenance. Under an operating lease, the leased asset is not considered an asset of the lessee; the lessee records the asset as an operating expense. This qualification for off-balance sheet treatment can result in improved return on asset (ROA or ROI) due to a lower asset base

Answer 38

Closed-End Lease – Closed-end leases are based on the concept that the number of miles driven annually is fairly predictable and that its value at the end of the lease (the residual) is therefore somewhat predictable. Closed-end leases are written for a fixed term, perhaps three years, providing for a flat monthly payment, a predetermined mileage limit and set penalties for exceeding the mileage limit, and for any excessive wear and tear. Open-End Lease – Open-end leases account for 95% of all leases used in fleet acquisitions. The open-end lease usually has a short minimum term of one to two years and continues thereafter on a month-to-month basis until the agreement is terminated. Open-end leases are often erroneously referred to as a “finance lease”. However, it is a financing method in which the amount owed at the end of the lease term is based on the difference between the leased unit’s residual value (resale value) and its realized value (depreciation.) Open-end lease costs are generally lower than closed-end leases because, unlike the closed-end lease, the lessee accepts the risk for the residual value of a vehicle when sold at lease termination. Similar to closed-end lease arrangements, the organization does not take ownership of the vehicle when the lease terminates. Most open-end leases contain a “step-down” payment scheduled wherein payments decline annually with no limits on mileage or wear and tear. • Terminal Rental Adjustment Clause, (TRAC) – Most open-end leases also contain what is known as a TRAC clause that ties the lessee to whatever difference may exist between the book and selling values of the unit upon remarketing. TRAC leases are an Internal Revenue Code defined variation on traditional open-end leases, combining all the advantages of leasing while keeping the option to purchase the equipment at the end of the lease term at a price set according to the amortization schedule when the lease term began. The primary difference between TRAC and most open-end leases is how the difference between the projected residual value and the actual sale proceeds may be treated. In a traditional open-end lease this difference is shown as a loss or gain to the lessee. In a TRAC lease this difference may be used to adjust the lease rate, ensuring any variation from the projected residual value is accounted for as an operating expense. This type of open-end lease may have significant tax advantages for non-public lessees.

Answer 39

The lease term is defined as the contractual term plus renewals where the lessee has a “significant economic incentive” to exercise the options. Significant economic incentive would include bargain renewals and renewals where the lessees would suffer an economic penalty for failure to renew.

Answer 40

interim rents, contractual rents, renewal and purchase options where the lessee has a significant economic incentive to exercise, termination penalties, the expected payment under residual guarantees, variable lease payments that are based on a rate or index and estimated variable payments based on usage or lessee performance that are “disguised” minimum payments (where the lease has below market contractual payments and has variable payments designed to “make up the difference” for the lessor). Those variable rents based on a rate (i.e. Libor) or an index (i.e. CPI) are booked based on spot rates with adjustments booked when the rate change changes contractual lease payments. However, in deliberations, the Boards tentatively decided to eliminate the requirement to estimate and record other contingent payments, notably those based on sales or excess asset usage. Estimates of renewal and purchase options are to be reviewed on each reporting date and if it becomes evident that the lessee has a significant economic incentive to exercise then the options must be recorded as estimated payments by adjusting the asset and liability balances. In addition, the ROU asset amortization and imputed interest schedules are adjusted as though the transaction is a new lease beginning on the adjustment date.

Answer 41

Estimated payments (not the full amount of the guarantee) under residual guarantees are booked as an estimated payment with review and adjustment at each reporting date. For lessors, a residual guarantee from the lessee or a third party does not change a residual to a financial asset (receivable). However, a manufacturer’s sale with a guaranteed resale or residual value would no longer be accounted for as leases. However, sales with buy-back agreements where the buy-back amount is less than the original sales price would be treated as leases.

Answer 42

A short-term lease is a lease that at the date of commencement of the lease has a maximum possible lease term, including any options to renew or extend, of 12 months or less. Lessees can either account for payments under these as an operating expense or as capitalized amounts under the new model (see below). Lessors may elect, as an accounting policy for a class of assets, to account for all short-term leases like today’s operating leases. Renewals with terms of 12 months or less are considered short-term leases (eligible for off balance sheet operating lease accounting) where both the lessee and lessor have the right to terminate the renewal without significant penalty.

Answer 43

• The “receivable & residual” (R&R) method is to be used for all leases of the entire asset to one lessee. This method produces results much like direct finance lease accounting for third party equipment; however, since this model does not distinguish between leases based on the significance of the assumed residual, the concept of a sales-type lease has been eliminated. The recognition of gross profit is limited to the profit on the right-of-use asset transferred, calculated by multiplying the total gross profit by the percentage derived by comparing the present value of the lease receivable to the fair value of the underlying asset. • Short-term leases may upon election be accounted for using the current GAAP operating lease method. • Investment properties (land and buildings) for qualifying real estate lessors that are investment companies use the “investment properties” method, that is, operating lease accounting with fair valuing of the leased asset, and • A “multi-lessee” exception allowing lessors in leases of investment property (commercial real estate) to use existing operating lease accounting.

Answer 44

For lessees, existing capital leases are grandfathered. All operating leases must be capitalized with a lease liability recorded equal to the present value of the remaining rents using the current incremental borrowing rate. The offsetting ROU asset is adjusted by a ratio of remaining rents to total rents and the amount of the difference between the ROU asset and lease liability is charged to retained earnings. For sale leasebacks, if the leaseback is a capital lease it is grandfathered and any gain continues to be amortized to P&L. If the sale leaseback is an operating lease the original sale leaseback assumptions must be re-evaluated under current rules possibly being re-booked as a financing or booked as an ROU lease under the lessee transition rules with any unamortized gain booked to equity. In any case, a lessee may chose full retrospective accounting for all its leases. For lessors, existing direct finance and sales-type leases are grandfathered. All operating leases are recorded as though they are new leases for their remaining term using the new lessor methods prescribed. For R&R leases the existing lease book value is derecognized and the present value of the rents is recorded. The residual is a plug where there is no gross profit in the leases. Where there is an existing gross profit in the operating lease to be capitalized details are not specified. Leveraged leases are booked as R&R leases with the rents and debt reported gross on the balance sheet.

Answer 45

base rates are set each billing cycle, based on the prevailing rates at the time. As interest rates fluctuate, so do monthly lease payments

Answer 46

set the interest rate at time of lease inception, and do not vary it throughout the lease term

Answer 47

• Administrative Fee • Interest Markup • Issuance Fees • Interest Rounding • Interim Interest • Interim Rent – Front end of lease • Interim Rent – Back end of lease • Fully depreciated lease admin fee – generally a flat dollar amount that is billed as long as the asset remains on the books, after it has been fully depreciated. • Variable interest rates based on conditions that may have nothing to do with leasing (for example, lease rates may spike if you cancel use of a maintenance program).

Answer 48

true tax lease or non tax lease

Answer 49

• Any part of the lease payment is applied to an equity position in the asset leased. • The lessee will, by default, acquire ownership (title) of the equipment upon payment of a specified amount of “rental payments” he or she makes. • Over a short period of time the equipment is used, the total amount that a lessee pays is an exceedingly large proportion of the total sum required to outright buy the equipment • The agreed upon payments exceed the current fair rental value. • At the time any purchase option may be exercised, the title to the equipment may be acquired for an exceedingly small purchase option price in relation to the actual value of the equipment. • Any portion of the lease payments are specifically designated as interest (or its equivalent.)

Answer 50

• Type of vehicle required - Regular sedans, vans and small trucks may be readily available as rentals at competitive prices. Specialty equipment or a vehicle with the proper equipment needed for the job may not be available. • Time required - Rentals are appropriate for short-term or infrequent requirements. For more common vehicle types, rentals should be considered for terms up to seven months. There are occasions when rental is appropriate for specialty equipment, where there is an infrequent requirement, such as a crane to move a piece of equipment once per year. • Cost - All rental decisions should be based on a business case analysis that considers leased, owned, employee provided, and even other options such as taxis or public transit.

Answer 51

The largest single benefit of renting over leasing or buying is that there is no long-term obligation, and in an economic downturn, renting can be an attractive and viable option.

Answer 52

• Replace vehicles that are being repaired or undergoing scheduled maintenance inspections, • Meet requirements during peak periods, • Meet infrequent specialty requirements, • A business case demonstrates that renting is the best option

Answer 53

rent vehicles. operate a carsharing/pool program, offer nothing (employees may be able to declare business use on their income tax), reimburse employees for driving personal vehicles on business

Answer 54

• Low Mileage Drivers – If employees` business use is sporadic or extremely low, reimbursement can be a cost effective alternative. Each business must calculate the mileage at which it is cost effective to reimburse instead of providing a company vehicle (usually up to 12,000 business miles/year range or 20,000 km). • High Employee Turnover – If the workforce is highly transient, the costs for storing, clean up, and transporting reassigned vehicles, and the administration required for these efforts, may make reimbursement a more desirable alternative than operating fleet vehicles, assuming the vehicles are not centrally located. • Temporary Drivers – Short-term assignments - someone whose business need exists on a project basis that will last less than 12 months. • New Hires – It may be cost effective to reimburse employees for driving their personal vehicle while waiting for a company vehicle to arrive, in lieu of a rental vehicle. • Startup Companies/Thinly Capitalized Companies – The organization may not have the capital funds to purchase vehicles or the revenue history to qualify for fleet leasing credit.

Answer 55

mileage reimbursement, fixed allowance, fixed and variable allowance (FAVR)

Answer 56

due to adverse tax implications, some organizations have transitioned from flat allowances to non-taxable Accountable Plan allowance programs. This approach combines a flat amount (typically based on ownership costs) with a per-mile reimbursement (often derived from actual operating costs). If structured according to IRS guidelines, the allowances are non-taxable and no withholding or fringe benefit value reporting is required

Answer 57

In a dual reimbursement structure, employees qualify for reimbursement at a higher rate (typically the IRS rate) if no organization-provided vehicles are available for/applicable to the employees’ travel needs, but receive reimbursement at a reduced rate if they decline to use vehicles provided by the organization (such as assigned, shared-use or motor pool vehicles)

Answer 58

• Business Connection - The costs being covered via the allowance and/or reimbursement must be incurred in connection with business purposes • Substantiation - Employee must provide information sufficient to substantiate the amount, time, place and business purpose of the expense, and • Employer Reimbursement - An allowance arrangement must require an employee to return to his or her employer within a reasonable period of time any amount paid under the arrangement in excess of the expenses substantiated.

Answer 59

Flat Rate per Mile Accountable Allowance Plan

Answer 60

is intended to be a deduction guideline for taxpayers who opt for a standard deduction in lieu of tracking business vehicle expenses diligently. The rate is derived from weighting and blending cost factors from across the U.S. It is not representative of vehicle ownership and operating costs for any specific vehicle in any specific geographic area of the country.

Answer 61

• Reasonably calculated, not to exceed the amount of the expenses or the anticipated expenses; and • Provided on a uniform and objective basis with respect to expenses; and • Periodically paid at a rate that combines a fixed rate and a variable rate; and • Be consistently applied in accordance with reasonable business practices.

Answer 62

fixed and variable rate allowance plan (commonly referred to as a FAVR) is an accountable plan that is essentially an IRS-supplied template for calculating and documenting vehicle allowances and reimbursements. FAVR guidelines include 21 data, program, and driver tests, which all must be met for the approach to be considered FAVR compliant.”

Answer 63

• Data - Must be derived from base locality, reflect retail prices, and be reasonable as well as statistically defensible in approximating costs of standard vehicles. Most data elements have specific requirements. • Insurance - Employees must maintain vehicle insurance consistent with levels used in deriving allowance amount. • Vehicle Age - Age of employees’ vehicles must not exceed depreciation schedule used to derive amount of the allowance. • Vehicle Value - Cost for a calendar year may not exceed 95% of retail dealer invoice plus state and local sales or use taxes up to $28,000 for automobiles, or $29,300 for trucks and vans. • Minimum Mileage - 5,000 annual business miles (80% of 6,250) • Business Use Percentage - Annual business mileage may not exceed 75% • Enrollment - At least five employees in the program • Management Employee Enrollment - Cannot exceed 50% of program enrollees at any time during the calendar year and enrollee cannot be a controlling employee of the corporation.

Answer 64

• Identify qualifying drivers (FAVR) or assign driver tiers by miles and/or job (non-FAVR); • Determine vehicle standards; • Collect driver information, proof of license and insurance, validation of vehicle make/model and purchase price/value; and • Verify driver-provided info (e.g., review registrations, compare against databases).

Answer 65

due to the purchasing power of most organizations, operating fleet vehicles is more cost effective, the average cost per mile to operative is typically lower than the IRS mileage rate

Answer 66

vicarious liability which holds the employer responsible for damages and employee safety

Answer 67

There are pluses and minuses to reimbursement programs from the employee’s perspective. On the plus side, employees have the freedom to choose their own vehicle, and the reimbursement program may allow them to afford a higher end vehicle they may not be able to finance in their personal budget. The downside is that reimbursement programs may under-compensate employees for business driving. One industry study found that employees over-report business miles by as much as 32% to make up for what they perceive as a shortfall in compensation for vehicle expenses. With reimbursement programs, documentation of business use, maintaining receipts, searching for and acquiring new vehicles, maintaining licensing compliance, managing maintenance repairs and managing crash repairs are some activities for which drivers are responsible. A certain portion of these activities will be performed during working hours and thus decrease employee productivity.

Answer 68

Controlling the type, condition and appearance of vehicles used for work is an important part of the organization’s image presented to customers and the community. Companies can mark vehicles with logos or other identifying items for marketing purposes and standardize models and colors to reflect organizational image. They also can ensure that proper maintenance and prompt repair of crash damage is performed, protecting the organizational image reflected by the employee when visiting customers. If the organization is concerned with its environmental impact, this adds another consideration to the decision regarding company vehicles. Fleet programs enable companies to exert some control over greenhouse gas emissions through vehicle selection. Some fleets have capitalized on the public relations opportunity presented by operating a fleet of alternative-fuel vehicles and branding them to relate this to the public. Companies have little to no control over the environmental impact of employees’ personal vehicles.

Answer 69

An allowance is any payment that employees receive from an employer for using their own vehicle in connection with or in the course of their employment, without having to account for its use. This payment is in addition to their salary or wages. An allowance is taxable unless it is based on a reasonable per-kilometer rate.

Answer 70

• What is and what is not an automobile? • When does a benefit arise (the personal use)? • How do you calculate the benefit for employer provided automobiles and other vehicles? • How do you calculate the allowance you give to your employee for using his or her own automobile or other vehicle?

Answer 71

• The allowance is based only on the number of business kilometers driven in a year. • The rate per-kilometer is reasonable. • The employee has not otherwise been reimbursed for expenses related to the same use of the vehicle. This does not apply to situations where the employer reimburses an employee for toll or ferry charges or supplementary business insurance, if the allowance has been determined without including these reimbursements.

Answer 72

To comply with the rules on reasonable per-kilometer allowances, employees have to file expense claims with the employer on an ongoing basis, starting at the beginning of the year. A flat rate or lump sum allowance that is not based on the number of kilometers driven cannot be averaged at the end of the year to determine a reasonable per-kilometer rate, and then be excluded from the employee’s income. There are sometimes administrative problems that can result from this. The following process can help mitigate them. If an employer issues accountable advances to employees for vehicle expenses, they do not have to be included in the employee’s income, if all the following conditions are met: • There is a pre-established per-kilometer rate that is not more than a reasonable amount. • The rate and the advances are reasonable under the circumstances. • This method is documented in the employee’s record. • No other provision of the Income Tax Act requires that the advances be included in the employee’s income. Employees have to account for the business kilometers they travelled and any advances they received. They have to do so on the date their employment ends in the year, or by the calendar year-end, whichever is earlier. At that time, the employer is to pay any amounts owed to the employee and the employee has to repay any amount over actual expenses. Where no repayment occurs, the employer cannot simply report the excess advances on the employee’s T4 slip

Answer 73

An employee may be able to claim certain employment expenses on his or her income tax and benefit return if, under the contract of employment, the employee had to pay for the expenses in question. This contract of employment does not have to be in writing, but both parties must agree to the terms and understand what is expected. For example, if an employee is allowed to use his personal motor vehicle for business and is paid a monthly motor vehicle allowance to account for the operating expenses, they would then be included in the employee’s employment income as a taxable benefit. If the allowance is taxable, it is also pensionable and insurable. CPP contributions, EI premiums, and income tax should be deducted. GST/HST should not be included in the value of this allowance. If an employee is paid an allowance based on a flat rate that is not related to the number of kilometers driven, it is a taxable benefit and has to be included in the employee’s income. Employees may be able to claim allowable employment expenses on their return. If an employee is paid an allowance that is a combination of flat rate and reasonable per-kilometer allowances that cover the same use for the vehicle, the total combined allowance is a taxable benefit and has to be included in the employee’s income. For example, an employer may pay an allowance to employees as follows: • A flat per-diem rate to offset the employee’s fixed expenses for each day the vehicle is required; and • A reasonable per-kilometer rate for each kilometer driven to offset the operating expenses. The flat per-diem rate compensates the employee for some of the same use on which the reasonable per-kilometer allowance is based. That is, the fixed expenses incurred by the employee to operate the vehicle.

Answer 74

A comprehensive fleet management strategy requires optimizing use of all viable transportation alternatives, including permanently assigned vehicles, short-term rentals from motor pools, commercial rentals/mini-leases, POV reimbursements or allowances, and other forms of transportation (e.g., taxi, airline, mass transit). To balance use of transportation alternatives effectively, the organization and its traveling employees must be able to identify and compare the costs and benefits of various options prior to making travel decisions. Breakeven analyses (BEAs) models can help assess transportation cost-effectiveness for single trips or for forecasted monthly or annual travel.

Answer 75

• Motor pools – Fleet vehicles centrally located which are shared by employees • Car sharing services – Companies such as Zipcar offer vehicles strategically located throughout metropolitan areas to members who make reservations through a website. These companies may also work with you to develop an onsite solution should reservation volume warrant it. • Public transportation – Taxis, buses, trains are all transportation options to be considered. • Car rental – On a temporary basis, this can be an effective transportation alternative. • Virtual Meetings – As the costs for video conferencing continue to decline, organizations are expanding use of this technology to minimize travel. This can be especially effective in eliminating repetitive commutes between locations, for instance, for monthly business meetings where attendees drive to a central location.

Answer 76

Exemptions from personal use fringe benefits fall into three categories - de minimus use, qualified commuter vehicle and qualified non-personal use vehicle. De Minimis Use - Use that is minimal or incidental in nature, would have little value to an employee, and would be unreasonable and administratively impracticable to account for. The value of any de minimis transportation benefit provided to an employee may be excluded from the employee’s wages. Qualified Commuter Highway Vehicle - This exclusion applies to a ride in a commuter highway vehicle (i.e., vanpool) between the employee’s home and work place. Generally, the employer can exclude qualified transportation fringe benefits from an employee’s wages, even if provided to the employee in place of pay. A commuter highway vehicle is any highway vehicle that seats at least six adults (not including the driver). In addition, the employer must reasonably expect that at least 80 percent of the vehicle mileage will be for transporting employees between their homes and work place with employees occupying at least one-half the vehicle’s seats (not including the driver’s). Qualified Non-personal-use Vehicles - A qualified non-personal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design.

Answer 77

• Clearly marked, through painted insignia or words, police, fire, and public safety vehicles (government license plates alone do not qualify) • Unmarked vehicles used by law enforcement officers if the use is officially authorized by the Federal, State, county, or local governmental agency or department that owns or leases the vehicle and employs the officer, and must be incident to law-enforcement functions, such as being able to report directly from home to a stakeout or surveillance site, or to an emergency situation. Use of an unmarked vehicle for vacation or recreation trips cannot qualify as an authorized use. • An ambulance or hearse used for its specific purpose. • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds. • Delivery trucks with seating for the driver only, or the driver plus a folding jump seat. • A passenger bus with a capacity of at least 20 passengers used for its specific purpose. • School buses. • Tractors and other special-purpose farm vehicles. • Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks • Qualified Moving Van, means any truck or van used by a professional moving company in the trade or business of moving household or business goods if personal use of the van is not allowed, other than for travel to and from a move site (or de minimis) and the specific move site is an irregular practice (i.e., not more than five times a month on average), and personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee’s residence in relation to the location of the move site, for the van not to be returned to the employer’s business location. • Qualified Specialized Utility Repair Truck is specifically designed to carry heavy tools and testing equipment or parts if the shelves, racks, or other permanent interior construction is such that it is unlikely that the truck will be used more than a de minimis amount for personal purposes, and the employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. Vans and pickups do not qualify under utility repair truck exclusion. • A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified non-personal-use vehicle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with a trade, business, or function and meets either of the following two requirements: oIt is equipped with at least one of the following: 1) a hydraulic lift gate; 2) permanent tanks or drums; 3) permanent side boards or panels that materially raise the level of the sides of the truck bed; 4) other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles); or oIt is used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified • A van with a loaded gross vehicle weight of 14,000 pounds or less is a qualified non-personal-use vehicle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For example, a van qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with a trade, business, or function and has a seat for the driver only (or the driver and one other person) and either of the following items. oPermanent shelving that fills most of the cargo area; or oAn open cargo area and consistently transports merchandise, material, or equipment used in the employer’s trade, business, or function

Answer 78

For an owned vehicle, FMV of an automobile purchased by an employer is the amount a “non-fleet” individual would reasonably pay to buy it from a third party in an arm’s-length transaction in the area in which the vehicle is purchased, including all purchase expenses such as sales tax and title fees. The value of specialized equipment added to, or carried in, the vehicle is excluded if the equipment is necessary for conducting business within the employer’s trade or business. In the case of an employer leased vehicle, the FMV is the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle. A comparable lease term would be the amount of time the vehicle is available for the employee’s use, such as a one-year period. Employers may not determine the FMV by multiplying a cents-per-mile rate times the number of miles driven unless the employee can prove the vehicle could have been leased on a cents-per-mile basis

Answer 79

Providing the employer is not the manufacturer of the vehicle, it may use certain safe-harbor values as the FMV. For a vehicle purchased at arm’s length, the safe-harbor value is the employer’s cost, including sales tax, title, and other purchase expenses. For a leased vehicle, the employer can use any of the following calculation methods as the safe-harbor value: • The manufacturer’s invoice price (including options) plus four percent • The manufacturer’s suggested retail price minus eight percent (including sales tax, title, and other expenses of purchase) • The retail value reported by a nationally recognized pricing source if that retail value is reasonable for the vehicle alternatives to General valuation rule are cents per mile, commuting, and annual lease value mile

Answer 80

An employer with a fleet of 20 or more passenger automobiles, vans, or trucks may determine the value of the personal use by using the Fleet-Average Valuation Rule to calculate the Annual Lease Value. Rather than calculating an individual FMV for each vehicle, the employer averages FMVs less than the annual FMV threshold limits set by the IRS. The employer must average all eligible passenger automobile FMVs separately from all eligible truck and van FMVs and, thus, uses two FMVs when calculating the Annual Lease Value fringe benefit for each vehicle type. The Fleet-Average Valuation rule may not be used if the FMV exceeds annual IRS thresholds. Trucks and vans FMVs thresholds are different than automobiles because the Consumer Price Index (CPI) rate of inflation is higher for “new trucks” than for “new car” components (of the CPI). This results in somewhat higher maximum values for trucks and vans for the purpose of calculating depreciation deductions. Under this revenue procedure, the IRS defines “trucks and vans” as passenger automobiles that are built on a truck chassis, including minivans and SUVs that are built on a truck chassis If the FMV of any passenger automobile or van/truck exceeds the IRS thresholds, the employer may determine the Annual Lease Value of such vehicles separately or use another rule (e.g., General Valuation).

Answer 81

Under this rule, the employer determines the value of a vehicle provided to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes. Personal use is any use of the vehicle other than use in the employer’s trade or business. This amount must be included in the employee’s wages or reimbursed by the employee.

Answer 82

• Begin using the cents-per-mile rule on the first day the vehicle is made available to any employee for personal use and continue to do so for all later years in which the vehicle is available to any employee. However, employers may switch from the commuting rule to the cents-per-mile rule on the first day for which it does not use the commuting rule. • The employer must continue to use the cents-per-mile rule when providing a replacement vehicle to the employee (and the vehicle qualifies for the use of this rule) and the employer’s primary reason for the replacement is to reduce federal taxes. • If the vehicle no longer qualifies for the cents-per-mile rule during a later year, the employer can use any other rule for which the vehicle later qualifies

Answer 83

Under this rule, the employer determines the value of a vehicle provided to an employee for commuting use by multiplying each one-way commute (that is, from home to work or from work to home) by $1.50. If more than one employee commutes in the vehicle, this value applies to each employee. This amount must be included in the employee’s wages or reimbursed by the employee.

Answer 84

Under this rule, the employer determines the value of a vehicle provided to an employee by using its Annual Lease Value. For a vehicle provided only part of the year, the employer can use either the vehicle’s prorated annual lease value, or its daily lease value.

Answer 85

prorated annual lease value or the daily lease value

Answer 86

If a vehicle is provided to an employee for a continuous period of 30 or more days, but less than an entire calendar year, the Prorated Annual Lease Value is calculated by multiplying the Annual Lease Value by a fraction, using the number of days of availability as the numerator and 365 as the denominator. If a vehicle is unavailable to the employee because of his or her personal reasons (for example, if the employee is on vacation), the employer cannot take into account the periods of unavailability when using a Prorated Annual Lease Value. An employer cannot use a Prorated Annual Lease Value if the reduction of federal tax is the main reason for doing so.

Answer 87

If the employer provides a vehicle to an employee for a continuous period of less than 30 days, the employer may use the Daily Lease Value to figure its value. The Daily Lease Value is calculated by multiplying the Annual Lease Value by a fraction, using four times the number of days of availability as the numerator and 365 as the denominator. The employer can apply a Prorated Annual Lease Value for a period of continuous availability of less than 30 days by treating the vehicle as if it had been available for 30 days, if it would result in a lower valuation than applying the Daily Lease Value to the shorter period of availability.

Answer 88

Employer - Obtain annual driver statement of use. Validate that the employee has kept adequate records to substantiate business miles, purpose and date. Employee - Maintain adequate records to substantiate business miles, purpose and date. May prorate if vehicle is used on a regular basis.

Answer 89

Recordkeeping is not required if the employer’s written policy prohibits personal use (other and de minimis) and the vehicle is garaged at the employer’s facility or is used for bona fide non-compensatory business reasons to commute to/from the employee’s home, and is parked at the employee’s home.

Answer 90

• The least-common method is to treat all miles as personal use and force the employee to deduct expenses from the employee’s tax return. This method can result in overpayment of FICA and unemployment taxes and can only be used in conjunction with the Lease Value Rule method to value the benefit. Some employers treat all miles as personal use if the employee fails to report business use by the required due date. • The second method is to impute income for the personal use miles determined by calculating the difference between starting and ending odometers and subtracting business miles. • Another method requires the employee to pay the employer for the value of personal use. Under this scenario, the employer is reducing the amount of business expense that is ultimately written off for tax purposes.

Answer 91

The Canada Revenue Agency (CRA) personal use tax regulations apply to motor vehicles, meaning automotive vehicles designed or adapted for use on highways and streets. It does not include a trolley bus or a vehicle designed or adapted for use only on rails. The term “vehicle” includes both automobiles and motor vehicles not defined as an automobile. Therefore, although an automobile is a kind of motor vehicle, Canada treats automobiles differently for tax purposes

Answer 92

The standby charge applies when an automobile is made “available” for an employee’s personal use. “Available” has common dictionary meanings, such as “capable of being used; at one’s disposal; within one’s reach.” Therefore, most employer-supplied automobiles clearly give rise to a standby charge. An automobile is generally considered available for personal use, except when the employee is forbidden to use the car personally and returns it to the employer’s premises at the end of the day or trip. An employer-supplied automobile that is used substantially for personal use remains available to the employee when the employee voluntarily surrenders the automobile and the keys to the employer on weekends, holidays or annual vacation. The automobile ceases to be available to an employee only if the employee is required by the employer to return both the automobile and its keys. employer owned = 24%x original cost employer-leased 2/3xannual lease cost based on the capital cost of the vehicle plus the post delivery capital improvements excluding the cost of radio receiving or transmission equipment required for business use Personal kilometers/1,667 ÷ Number of months in the year the car was available

Answer 93

An operating cost benefit is included in the employee’s income when the employer pays operating costs that relate to personal use of an employer-provided automobile. Personal kilometers driven in the year X Current per-kilometer rate

Answer 94

Vans, pickup trucks, and similar vehicles that seat no more than three persons including the driver are exempt from the deductibility restrictions applicable to automobiles (i.e., standby and operating calculation methodology) if their use is “primarily” (i.e., more than 50 percent) for the transport of goods, equipment and/or passengers in the year of acquisition meets relevant benchmarks. This can be increased in certain cases to include extended cab pickups at work sites, and in cases where the driving is all or substantially all for the transportation of goods or passengers in the course of a business activity.

Answer 95

the employer has documented in a published manual (e.g., policy) and if all of the following four conditions are met: • The motor vehicle is especially designed or significantly modified to carry tools, equipment or merchandise for the business or trade and is essential in a fundamental way for the performance of the employment duties. • The motor vehicle is suited for and consistently used to carry and store heavy, bulky or numerous tools and equipment and is essential in a fundamental way for the performance of the employment duties, e.g. pick-up trucks and vans. The tools and equipment contemplated are those of a nature that cannot easily be loaded and unloaded from the vehicle, and exclude tools and equipment such as office supplies, work documents, laptops, and personal travel items. • The motor vehicle is used on a regular basis to carry material that is noxious and malodorous, such as veterinary samples or fish and game, or • The employee is on-call for emergencies as described above, the motor vehicle is a clearly marked emergency-response vehicle, or specially equipped so as to provide for rapid response, or for the purposes of carrying specialized equipment to the scene of the emergency.

Answer 96

With respect to logbooks and sufficient backup evidence, generally, as the percentage of business use and the related expense claims increase, more documentation is expected (by CRA) to be available. Businesses can choose to maintain a full logbook for one complete year to establish the business use of a vehicle in a base year. After one complete year of keeping a logbook to establish a base year, a three-month sample logbook can be used to extrapolate business use for the entire year, providing the usage is within the same range (within 10 percent) of the results of the base year. Businesses will need to demonstrate that the use of the vehicle in the base year remains representative of its normal use.

Answer 97

acquisition cost, cost of fuel over the vehicle’s life, lifetime maintenance and repair costs, and its resale value,

Answer 98

• Determine Replacement Times – While a lifecycle model can help pinpoint which vehicle to place in a fleet, it can also reveal the optimum time to get rid of it, based on various factors and costs. • Lease vs. Buy – For many companies, purchasing a vehicle may not be the most effective way to acquire the vehicle. A lifecycle model can compare the overall costs of owning versus leasing a vehicle, thereby showing the optimum decision for a particular set of circumstances. • Employer vs. Employee Provided – Some companies provide a vehicle to their employee in order for the employee to do their job. Other companies reimburse an employee for the use of their personal vehicle. Which is more effective, or the best cost option? A lifecycle analysis can show which option is better for the company or for the employee over time. • Alternate Fuels – Is placing a CNG truck in a fleet cost effective? Or would an electric vehicle make more sense? A lifecycle model can compare the options and give you a better picture as to which one may give a greater return on investment. • In-House vs. Outsourcing – Maintaining a vehicle is expensive. For some, having a garage where the vehicles can be maintained is more costly than if the work is outsourced to companies that specialize in this function. Lifecycle analyses can determine if having a garage and its associated costs is better or worse than outsourcing all work.

Answer 99

Net Acquisition Cost (purchase price plus cost to place into service), MINUS Net Remarketing Revenue (resale price minus cost to remove from service and sell)

Answer 100

• Omission of necessary data • Lack of a systemic structure or analysis • Misinterpretation of data • Wrong or misused estimating techniques • A concentration on wrong or insignificant facts • Failure to check all calculations • Estimation of the wrong items • Using incorrect or inconsistent escalation data

Answer 101

accuracy of the data and the validity of the assumptions make about the future. document data sources and and any assumptions uses

Answer 102

target months in service, target replacement mileage, expected mileage per month, lease annual interest rate, lease management fee, book depreciation rate, cost of fuel per gallon, estimated personal use, daily bridge rental rate

Answer 103

target months in service, target replacement mileage, and expected mileage per month

Answer 104

look at older models of the same vehicle to see what they sold for based on age and mileage, look at auction figures

Answer 105

A simple method of determining interest would be to use a step-rate formula. This formula would calculate interest (or cost of money) on a yearly basis, with adjustments for any months in a year the vehicle is not in the fleet. Can use investment rate or return on investment rate Monthly interest can be figured as the annual interest rate divided by 12 (7.85% / 12).

Answer 106

depreciation, interest, interest charges from leasing companies, management fee (either from leasing co or what the fleet charges customers if it uses an internal service fund), insurance but only if it is calculated per vehicle (if self insured then all veh are allocated costs equally so should not be considered), rental costs during wait for deliver, tax incentives/rebate checks have to be removed from the fixed costs

Answer 107

fuel and repairs/maintenance. Fuel using estimated life of vehicle (83,600 miles) and miles per gallon (20mpg), cost of fuel ($2) (83,600 / 20) x $2 = $8,360 maint costs may use average repair costs over the life of the fleet or leasing companies have data on cents per mile cost of many veh. Manufacturer may also have cost estimates. Using cents per mile (ex $0.14 per mile) 83,600x$0.14=$11,704

Answer 108

Personal use is calculated against both fixed and operating costs. If an employee drives 20% of the time for personal use, then 20% of the fixed and 20% of the operating costs of the vehicle over its life are attributable to the employee’s use. If employee reimburses then personal use costs should be removed from lifecycle costs, if employee is taxed then personal use costs cannot be subtracted

Answer 109

Net Acquisition Cost + Fixed Costs + Operating Costs = Total Lifecycle Cost total lifecycle cost / miles driven

Answer 110

Keeping older vehicles reduces the amount of money an organization has tied up in assets which can be an important in fiscal matters such as tax rates, stock valuation and even bond ratings for public entities. Also, totaling a $1,000 pickup in a collision is less costly than totaling a $10,000 pickup. The downside to keeping older vehicles is higher maintenance and downtime for older vehicles. Replacing a fleet at longer intervals means it takes longer to switch over to new technologies which make vehicles safer, cleaner burning, and more fuel-efficient. Additionally, there are other factors such as morale and organizational image that are difficult to quantify. There are a couple of hard facts that are at the crux of the optimum replacement decision. Firstly, because depreciation is such a large cost relative to the others, it will decline faster than maintenance costs increase. This may go contrary to conventional wisdom because most people remember the $2,000 repair bill on the 10-year-old car much more clearly than they do the $2,000 depreciation loss when they drove it off the dealer’s lot. The second is the unquantifiable factor. Company image and employee morale may actually factor into the replacement decision, even though these items have no direct financial impact.

Answer 111

annual miles driven, annual shifts (# of shifts a vehicle is used per year on average one person will do 256 shifts per year), maximum replacement years (# years veh is expected to be in the fleet), max replacement miles, net acquisition cost, interest rate / ROI, miles per gallon, fuel cost per gallon, loaner veh cost (per mile) while veh is down for maint/repairs

Answer 112

manufacturer recommended maint schedule, cost of a loaner vehicle, anticipated cost and frequency and time it takes to do each item

Answer 113

if the time to perform repairs necessitates a rental. ex - when the vehicle will need to be down hours or however many shifts for specific maint services

Answer 114

total financial impact for each year the vehicle is in the fleet, resale value, mileage, operating costs (fuel and maint including rental) , fixed costs (projected resale and mileage at replacement) add the operating and the fixed costs to see the lifecycle cost per year for each veh

Answer 115

What should be looked at is the point where the lifecycle costs for the vehicle start to increase. This is the point where the maintenance and repair costs actually are accumulating faster than depreciation progresses.

Answer 116

• Planned Vehicle Life • Cost of Money • Management Fees • Book Depreciation • Build Time Delay • Personal Use • Downtime Cost • Predicted Resale Values

Answer 117

so you can determine what the future cost to replace a vehicle one (1) plus the inflation rate, to the number of years, multiplied by the present cost (Future Cost = Present Cost x (1 + inflation rate)^t). 25,000x(1+2%)^4 = 27,060.80 to know how much to set aside for the future, find present worth to find present worth = Present Cost x (1 + interest rate)^-t 27,060.80x(1+4%)^-4 = 23,131

Answer 118

Strategic planning is an organization’s process of defining its strategy and making decisions on allocating its resources to pursue this strategy, including the allocation of its capital and people. The outcome of the strategic planning process is a set strategic plan that is used as guidance to define functional and divisional plans. More simply, the organization tries to figure out where it is going, how it is going to get there, and checks to see if it got there or not. The process of developing a strategic plan is part of the business of running an organization. Top management establishes the organization’s philosophies, guidelines and mission and provides overriding policies for the organization. It is the department manager’s responsibility to actively participate in this process, to ensure they are involved in the communication process and to show (through actions and communication) their support for the strategic plan

Answer 119

The fleet manager should take the lead in providing formal feedback to top management when their goals and objectives cannot be accomplished due to conflicts with the strategic plan. They should also provide positive feedback where the vision provided helps to achieve the goals. Keeping people informed and motivated is important. Celebrating the accomplishments improves morale and builds the ability to achieve more than is possible any other way. This is also the best way to develop the trust and real feedback needed to make improvements in an organization.

Answer 120

an acquisition section, a fixed costs section, an operating costs section, a personal use section and overall totals.

Answer 121

original parameters of the vehicles - fuel or other costs

Answer 122

depreciation decreases over time, sharply at first and then more gradually

Answer 123

generally increase over time but also may have spikes as major components are replaced on predictable intervals

Answer 124

It is the downtime expense going up as both repairs and breakdowns come more often and become more severe that usually becomes the deciding factor in an optimum replacement analysis like this.

Answer 125

The fleet manager’s objective is to convey information in order to achieve approval. First, he must determine what he is trying to accomplish and then he must build his case around that. Using the strategic plan and linking it to fleet recommendations is a good way to proceed.

Answer 126

the process of comparing performance with other organizations, or industry standards, to identify comparatively high performance levels and learn what it is that allows the achievement of high levels of performance used in management to evaluate certain aspects of processes in relation to industry best practices, sometimes within the same organization (internal benchmarking) or with other similar organizations or operations (external benchmarking). It can be conducted as a one-time event, or an ongoing process. It is not sufficient to merely compare performance; to be truly effective benchmarking involves gaining an understanding as to why organizations do well, and, as a result, what you need to do to achieve similar results. can be used to develop an understanding of fleet conditions and performance attributes that cannot be attained through first-hand observation or second-hand information. can provide focus to processes and performance improvement efforts. may allow you to zone in on underlying causes of performance deficiencies helps you gauge progress towards the attainment of specific goals and objectives. can communicate competence and competitiveness.

Answer 127

• Focusing on areas of performance within an organization that require improvement. • Identifying ideas from other organizations that may assist in improving performance. • Creating an agreed upon strategy on how to move an organization forward • Making more informed decisions based on improved knowledge of potential performance.

Answer 128

determine what is important to your organization and the attributes that are measurable and able to be tracked to determine progress toward those objectives

Answer 129

internal data from fleet management info systems or other corporate systems, customer surveys ,, cost data fuel, maint, lifecycle), crash stats, peer data, etc.

Answer 130

• Total operating cost per mile/km (based on similar vehicle platforms) • Total lifecycle costs per mile/km • Fuel efficiency • Vehicle utilization • Vehicle downtime • Crash costs

Answer 131

"a failing grade" means it is time to review ways to improve performance. process mapping and gap analysis can be helpful you can't know where you need to improve if you aren't monitoring performance

Answer 132

• Work scheduling • Exception reporting • Employee Training • Communication • Quality assurance • Incentives/rewards • Acquisition methods/policies/practices

Answer 133

• Vehicle availability or downtime rate • In-service breakdown rate • Ratio of actual to budgeted expenses • PM schedule adherence rate • Work order turnaround rate • Average maintenance and repair backlog • Mechanic productivity rate • Total life cycle cost • Total cost per mile/kilometer • Direct/billable hours by mechanic • Efficiency rate by mechanic • Repair comeback rate by mechanic • Parts order fill rate: percentage of orders filled from stock • Parts order fill time • Inventory turnover rate • Inventory utilization rate: percentage of inventory lines used in last 12 months • Technician to supervisor ratio • Technician to parts technician ratio • Ratio of administrative and managerial personnel to direct service personnel • Ratio of vehicles to fleet management personnel

Answer 134

system of parameters or ways of quantitative and periodic assessment of a process that is to be measured, as well as the system to carry out and assess such measurements

Answer 135

• Maintenance cost per mile or km • Maintenance cost per vehicle specification • Overall fuel consumption • Number and frequency of breakdowns • Number and frequency of technician road calls • Hours of service lost • Schedule hours versus actual hours • Average vehicle utilization • Average collision rate

Answer 136

• Identify areas for improvement • Illustrate good performance (particularly to management) • Help achieve goals and objectives • Build a business case to obtain more resources • Build a business case to change method of doing business (i.e. outsource, in-house, etc,) • Emphasize value to clients or management • Improve client satisfaction • Help establish budgets • Refocus priorities • Measuring a contractor’s performance • Regulatory compliance • Improve productivity • Improve equipment productivity and effectiveness • Control maintenance costs

Answer 137

Performance metrics are useful indicators of the tactical day-to-day performance of fleet operations, as well as strategic long-term performance trends. They provide a rational, quantifiable methodology with which to evaluate performance and to compare that performance with past performance and/or peer organizations.

Answer 138

Executive Manager, Customer • Vehicle availability or downtime rate • In-service breakdown rate • Ratio of actual to budgeted expenses • Crash rate Fleet Manager • PM schedule adherence rate • Work order turn-around time • Average maintenance and repair backlog • Technician productivity rate • Fuel consumption rates • Total life cycle cost by spec Maintenance Manager • Direct/billable hours by technician • Efficiency rate by technician • Repair comeback rate by technician Parts Manager • Parts order fill time • Parts order fill rate • Inventory turnover rate • Percentage of inventory with no movement in last 12 months

Answer 139

balanced scorecard and dashboard

Answer 140

so you know how you or your vendors are doing, where are you now, where do you want to be, and how will you get there? how will you illustrate to sr management that your fleet is being managed well? Are you performing the services the client requires?

Answer 141

• Support organizational objectives by keeping vehicles and equipment in good operating condition. • Keep maintenance facilities in a safe and functional state. • Perform quality work. • Anticipate and prepare for future organizational priorities • Strive for continued improvement, by evaluating performance, taking corrective action and measuring progress.

Answer 142

policies and expectations for guide staff in supporting activities. appropriate resources, measurement tracking and benchmarking can help identify and address resource issues

Answer 143

being forced to do more with fewer resources

Answer 144

equipment data management, work-order control, preventive maintenance, inventory control, documentation control, system security, ease of use, customizable reports, user configuration and metrics.

Answer 145

when work is covered by warranty and when costs deviate from contract rates

Answer 146

decide what is important enough to track, how often to track, and who should be checking. what to measure and report on, what the thresholds are

Answer 147

what is considered exceptional enough to warrant more review - aka lower than average MPG or higher costs than normal for a part

Answer 148

negotiated agreement designed to create a common understanding about services, priorities and responsibilities

Answer 149

• Maintenance or other services to be provided • Service Standards, such as time frames • Responsibilities of both parties • Costing details, including escalation factors

Answer 150

• How service effectiveness will be tracked • Communication (how effectiveness will be reported) • Conflict resolution • Review/revision procedures

Answer 151

• Data gathering (highly dependent upon the effectiveness of computerized fleet management software) • Consensus between parties • Outline responsibilities of both parties • Draft, implement and manage the agreement

Answer 152

• Sets clear performance expectations of the customer and service provider. • Clarifies the roles and responsibilities of both parties. • Focuses attention on customer’s priority needs. • Encourages a service quality culture and continuous improvement. • Provides a mechanism for both parties to plan for the future. • Puts purchasing power into the hands of the customer. • Provides a useful tool for the customer to monitor performance. • Service providers are in a better position to plan their delivery function. • Can provide greater certainty of income for service providers.

Answer 153

A service level is an agreed measure that might include one of the following elements to describe the performance of a service delivery: • Quantity • Quality • Timeliness • Cost

Answer 154

action - Service faults should be reported immediately and prompt action should be taken response -Visual checks relating to vehicle serviceability specified in the owner’s handbook will be made at the beginning of every working day / goal 95% All other service matters affecting serviceability reported by users through vehicle logs will be acted on before the vehicle is next made available for use if the matter relates to the roadworthiness of the vehicle / goal 100% action - Fleet vehicles will be regularly serviced in accordance with manufacturer requirements response - Fleet vehicles requiring service will be booked in for the service within 24 hours of the service becoming due, or within 24 hours of the return of the vehicle to Fleet Management after use / goal 100%

Answer 155

find out what they really want and to ensure buy in The critical areas of practice in the establishment of measurements are: • Define what measurements mean the most to your customers, stakeholders and employees. • Commit to initial change. • Maintain flexibility.

Answer 156

• Lead by example. • Cascade accountability: share it with the employee. • Keep the employee informed. • Keep the customer informed. • Make accountability work: reward the employee.

Answer 157

• Be willing to invest both time and money to make it right. • Make sure your performance data means something. • Recognize that not everything is online or in one place. • Measure the right thing, and then measure it right. • Centralize the data collection function at the highest level possible.

Answer 158

• Combine feedback and performance data for a more complete picture. • Conduct root-cause analyses. • Make sure that everyone sees the results of analyses.

Answer 159

• Connect to employees and customers. • Connect to the business plan. • Integrate with data systems. • Integrate with the budget process.

Answer 160

1. Good leadership relies on good communication 2. All members of the organization must have clearly-defined responsibilities. The best leaders… • Report back to the employees, customers and other stakeholders • Use self-assessment tools • Involve the legislative/legal branch through consultation or representation on working groups and committees • Involve the customer, stakeholder and employee at every phase of the management process • Involve the unions early and often.

Answer 161

to anticipate the needs of the organization, short term and long term. both will impact the budget

Answer 162

The greatest impact to any budget is the acquisition of new vehicles and remarketing of aged vehicles. Therefore, having a vehicle replacement policy is an important element to accurate budgeting. Once you can predict how many of each vehicle type you will be replacing over a given budgetary period, you can begin to shape your budget.

Answer 163

Fleets can acquire vehicles by either using capital dollars or financing them as leased vehicles. Your organization’s finance department will determine how this is treated. For vehicles purchased with capital funds, there are different methods for depreciating assets including straight-line depreciation, double declining balance depreciation, and others. Your finance department will determine how depreciation is allocated to the monthly operating budget. For example, a vehicle that was acquired using capital dollars for $24,000, and is depreciated over a 4 year period using straight line depreciation method will appear as a $500 monthly depreciation expense in the operating budget

Answer 164

depreciation and fuel

Answer 165

use the replacement policy to create a schedule to assist in building the budget . Look at driving patterns, new hires, total losses, for leased vehicles strive to break even at the end of the lease

Answer 166

• Cost per gallon • Driving patterns: Static or dynamic territories? • Change in average fleet age: Older fleets will consume more fuel than newer fleets • Change in average vehicle fuel economy: Are you introducing a large number of hybrids into the fleet?

Answer 167

group vehicles into mileage-band categories, project the # of vehicles in each category based on average monthly miles driven. Also consider standard preventative maint, brakes, tires, extended PMs, major component failures, drive train component failures, and when they may be needed based on use.

Answer 168

past driver behavior with the addition of CPI

Answer 169

Lease schedules for a coming year are fairly predictable with stable interest rates, even for floating rate financing. You can consult various government and economic websites for interest rate projects, (e.g. Bloomberg.com, Money.CNN.com, Bankrate.com, CBO.gov, etc.), and also consult your organization’s institutional lender.

Answer 170

For open-end leases, the goal should be to break even at the back end of the lease. Setting depreciation rates properly based on vehicle usage is one part of achieving this. The other part depends upon the used vehicle market, which can fluctuate by the time the vehicle actually comes out of service. However, budgets for these settlements will be projected much closer to when the vehicle is sold, allowing for reasonable projections of settlements given used vehicle market conditions at the time. For closed-end leases, the used vehicle market is not a concern at settlement time; however, budgets for these leases should include estimates for back-end charges such as excess mileage and returned vehicle damage. Excess mileage charges can be reasonably projected based on driving patterns. Returned vehicle damage and other lessor fees can be reasonably projected based on past experience with the lessor for your fleet vehicles.

Answer 171

past driver behavior and CPI

Answer 172

If your fleet size does not fluctuate significantly, these expenses generally remain the same year over year except for increases in state fees. Applying a CPI factor to these expenses will reasonably account for any changes.

Answer 173

Outsourced fleet management fees are reasonably predictable based on prior year fees. Internal administration resources would include salaries and benefits for all fleet staff and an allotment for overhead that is based on headcount.

Answer 174

Fleets that operate their own internal garages must also include the operating expenses for maintenance garages. These are not treated in the same manner as other facilities that are considered part of the overhead allocation. Regular inspections and repairs to facilities and equipment need to be included in the fleet budget. Replacement for capital tools, (e.g. garage lifts, diagnostic machines, etc.) are typically included in the capital budget and allocated to the operating budget as depreciating assets.

Answer 175

1-2 months prior to the end of the fiscal year

Answer 176

One - Beginning one to two months prior to the end of the fiscal year, fleet managers need to establish their budget for the next fiscal year. Two – Put together a schedule of the organization’s planned activities for the coming year, and identify impact to the fleet budget. Three – Determine available funds, including carryover balance from prior year, cash on Four – Identify sources of income and estimate when it will come available, including employees’ payroll deductions for personal use of company vehicles, charge backs to other departments for use of pool vehicles, etc. Five – Identify expenses, both regular and periodic. Be sure to plan for events such as: • Organizational activity (e.g. new product launch brings in 200 new hire sales reps needing cars in fall) • Fleet initiatives (e.g. launch of new safety training program which all drivers will complete in the spring) • Scheduled travel and training (e.g. NAFA I&E Convention, site visits, supplier site visits) Six – Get price quotes for planned expenses, such as new vehicle acquisitions with updated model year information. Seven – Negotiate expenses as necessary. Eight–Submit initial budget recommendations. If you are proposing to include any new expenses in the budget, you will need to build a business case for this new expenditure. A strong case will include an examination of the Return On Investment (ROI) with a payback period calculated. You will have a better chance at approval if you can directly tie this initiative to organizational objectives. Nine – Executive committee reviews submitted budgets, advises of any bottom- line changes that need to be made. Ten – Review and revise the budget, keeping intact budget for most critical expenditures, and trim back on less critical expenditures as needed. Submit final budget to management.

Answer 177

employee payroll deductions for personal use, chargebacks to other depts for pool vehicles

Answer 178

regular and periodic, but also any new activities or program expansions that will require additional costs, travel, training, etc

Answer 179

have procedures to approve expenses and only allow approved ones. communicate procedures, monitor to ensure compliance with procedures, perform periodic audits of records

Answer 180

cost per mile and cost per vehicle per month