Our last column dug into some of the reporting practices used by Hertz Global, specifically its somewhat misleading depreciation of its rental fleet.We noted that Hertz reported the fleet in the 2006 10-K as a long-term asset, showing full cost less accumulated depreciation. It also showed depreciation as an add-back to net income in the operating section of the cash-flow statement. To provide a scale, out of $18.7 billion total assets, the fleet's book value at the end of 2006 was about $7.4 billion, or 40 percent. On the cash-flow statement, the reported operating flow for 2006 was about $2.6 billion, after adding back $1.8 billion of depreciation.

This does not make sense to us, because depreciation is a cash expense for Hertz, since it acquires only the short-term use of the vehicles through repurchase agreements that specify the initial purchase price and the amount that the factory will pay to take them back. Because the average life of any vehicle is only 10 months, we think that better accounting would report the fleet as a current asset like prepaid rent, and not add back depreciation to net income in the cash-flow statement. In effect, Hertz managed to look better with on-balance-sheet financing by making current assets look as if they're noncurrent.

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