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Putting Off Balance Sheet Leases Back On The Balance Sheet3/20/09 - The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have taken the first step to modifying lease accounting rules to require companies to begin listing their operating leases on their balance sheets. The associations launched a public discussion on lease accounting by publishing their preliminary views in a joint discussion paper. The discussion paper, Leases: Preliminary Views is a response to concerns raised by investors and other users of financial statements regarding the treatment of lease contracts under International Financial Reporting Standards (IFRSs) and U.S. generally accepted accounting principles (GAAP). According to the World Leasing Yearbook 2009, total annual leasing volume in 2007 amounted to $760 billion; yet many of those lease contracts do not appear in an entity's statement of financial position (balance sheet). This is because IFRSs and U.S. GAAP split leases into two categories-finance leases (capital leases under U.S. GAAP) and operating leases - and only the assets and liabilities arising from finance leases are recognized in the statement of financial position. For an operating lease the lessee simply recognizes lease payments as an expense over the lease term. In the discussion paper the IASB and the FASB discuss a possible new approach to lease accounting. The boards propose that lease accounting should be based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognized in an entity's statement of financial position. This approach is aimed at ensuring that leases are accounted for consistently across sectors and industries. The Equipment Leasing and Finance Association (ELFA) responded to the paper by issuing a statement saying that it is worried the proposed changes may add more "complexity, subjectivity and uncertainty" to lease accounting. "If the proposed changes do not reflect an appropriate balancing of costs and benefits, they could result in an unwarranted increase in cost of capital to U.S. companies that utilize leasing as a means of capital formation through the acquisition and investment in capital plant and equipment or real estate," said ELFA President Kenneth E. Bentsen, Jr. The boards have not yet discussed the method of transition or the effective date. Those issues will be discussed after comments are received on this discussion paper, and included in the provisions of a subsequent exposure draft of the proposed standard. The discussion paper is open for comment until July 17, 2009. |
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