Proposed changes in lease accounting standards could have a broad negative impact on the U.S. economy, triggering a $10 billion reduction in gross domestic product and 60,000 fewer jobs by 2016, according to a new study from the Equipment Leasing & Finance Foundation.

William Sutton

FASB has made changing the leasing standards one of its priority projects. The proposal would change how leases are accounted for on corporate balance sheets. The new study attempts to substantiate how the complex proposal might affect the fragile U.S. economy.

Most U.S. companies across a wide spectrum of industries lease equipment or real estate as part of their day-to-day operations, the group pointed out. Currently, operating leases are not reported on companies' balance sheets; they are reported in the footnotes to companies' financial statements. The proposed lease accounting changes, from the Financial Accounting Standards Board and the International Accounting Standards Board, would require companies to record virtually all leases on their balance sheets (see Accounting Boards Propose New Leasing Standards). The study's analysis of financial data reveals that the proposal would depress company profits, economic growth and financial stability.

According to the study, many businesses do not object to having to record leases on their books. They object, however, to how the proposal would require them to account for and report lease transactions. The study contends that aspects of the proposal are too complex, impose burdensome regulation on businesses and do not accurately reflect the economics of the lease transaction.

The new study finds that under the lease accounting proposals being considered by the IASB and FASB, U.S. companies would add an estimated $2 trillion to their balance sheets, an 11 percent increase in total debt. Higher debt-to-equity ratios could increase volatility in corporate earnings and companies' ability to secure financing, among other consequences.

U.S. companies could experience a 2.4 percent reduction in pre-tax net income in the first year of the new accounting rule, according to the report. The cost of debt could also rise through higher interest rates. Every 50-basis-point increase would trigger a $10 billion reduction in GDP and 60,000 fewer jobs by 2016. The proposal would also cause a permanent reduction of $96 billion in the equity--net worth--of U.S. companies, a sizable erosion of shareholder ownership value.

Several components of the proposal could offer stumbling blocks for U.S. businesses. The potential negative fallout from changing lease accounting rules includes lower earnings, reduced capital and deferred tax assets for companies that lease; costly implementation; elimination of vital financing options; adjustment to key financial metrics that investors use to determine company valuations and credit agencies use to determine credit worthiness; and additional unintended consequences.

The Equipment Leasing and Finance Association is urging businesses to send comment letters to FASB and IASB with their concerns. The two boards have announced plans to issue a new draft of their proposal by early April 2012, with a 120-day comment period (see Accounting Boards Want More Feedback on Leasing Changes). ELFA is urging the boards to listen carefully to the feedback they receive on the proposal.

"Leases account for hundreds of billions of dollars in transactions annually, contributing not only to businesses' success, but also to U.S. economic growth, manufacturing and jobs," said ELFA president and CEO William G. Sutton in a statement. "It is essential that the boards carefully consider comprehensive public input and comment before finalizing their proposal to ensure a workable lease accounting standard.”