FASB and IASB Team Up to Attack Sloppy Lease Accounting
Pic credit: West Sacramento
For those unfamiliar with accounting rules, you might think it's as simple as remembering to stick the debits on the left and credits on the right and hoping the balance sheet balances. You might even think that it's a pretty boring gig and that accountants thrive on the transparency of numbers, which are pretty much intrinsically incapable of telling a lie unless you intentionally add them up incorrectly.
For those of us who know better, financial statements can come jam-packed with all sorts of landmines that might make any reasonable person wonder if "usefulness" is truly a goal of financial reporting or simply something we say because it sounds good.
Lease accounting is no different. Lucky for all of us, FASB and the IASB are hard at work trying to modernize lease rules that have barely changed at all in the last 30 years. At the heart of the issue are operating leases, which allow companies to keep lease obligations off sheet if they meet certain criteria.
Emily Chasan via Reuters:
U.S. and international accounting rule makers are planning to propose an overhaul of lease accounting as soon as Tuesday, in a move expected to affect some $1.2 trillion in leased assets.
Under the changes being contemplated, companies would likely have to recognize a liability for future rental payments and an asset for the right to use the asset they are leasing. Many of those leases now are classified as "operating leases" and exist off the balance sheet.
A FASB spokeswoman declined to comment on the final proposal, but said that the boards do expect to release it next week.
"Operating leases have long been considered one of the major off-balance sheet obligations, so there was this view that in an operating lease, the lessee has incurred an obligation and that it should be reflected on the balance sheet," said Janet Pegg, an accounting analyst at UBS Investment Bank.
In my humble opinion leases are the least of our concerns if the goal is to give a better picture of a company's financial health as there are far worse boogiemen hiding in the footnotes. Beyond that, you're looking at a few hundred billion dollars in off-sheet activity, not the several hundred trillion in investment exposure that banks are allowed to hide, so why exactly do we care?
Leasing arms will simply digest any changes and adjust accordingly, whether that means finding a new loophole or passing on the inconvenience to the customer, that's all. But hey, whatever, making them all capital leases would surely simplify things.