More than half of global businesses are unaware of pending lease accounting changes that would virtually eliminate the use of off-balance sheet leases, according to a new survey by Grant Thornton.
The survey found that 54 percent of the global businesses polled were unaware of, and therefore unprepared for, the significant changes proposed by the Financial Accounting Standards Board and the International Accounting Standards Board in accounting for lease contracts.
Awareness of the change was greatest in the United States at 69 percent of those polled, along with Mexico at 68 percent and Chile at 63 percent. Awareness was lowest in mainland China, with only 5 percent of the survey respondents aware of the upcoming changes, Denmark with 8 percent of respondents and Turkey with 13 of respondents.
The survey of 2,800 businesses globally was completed in early September 2011. It also found that, of those who were aware of the changes, 33 percent thought the change would increase cost and complexity, but only 15 percent thought it would increase transparency. Only 12 percent of businesses indicated they would change the way they structure leases in the future.
FASB and the IASB are scheduled to re-expose their latest proposals on lease accounting next year. Grant Thornton emphasized the need for businesses to assess the impact of the potential changes and for investors to consider whether the new model will make leasing activities more transparent and financial statements easier to use.
“There is no question that a global review of lease accounting is long overdue,” said John Hepp, a partner in Grant Thornton LLP’s Accounting Principles Group. “The lack of transparency with regard to leases has festered for years, but a major change to lease accounting is a once-in-a-generation event, and the IASB and FASB need to be patient to get things right. Our survey findings should give the boards pause for thought as businesses are seeing costs and complexity in the proposals, but are questioning whether there is any improvement in transparency. Some of the proposals we’ve seen could create a different set of incentives to structure leases to achieve desired accounting outcomes. Change for the sake of change is not the goal, and a rush to a new standard could actually make things worse.”
Hepp added that Grant Thornton welcomes FASB and the IASB’s decision to consult publicly on their latest thinking, which they are doing by re-exposing the latest version of the proposed standards.
“We desire a new standard that is practical for business — avoiding undue complexity and excessive estimation uncertainty,” he said. “Investors need transparent, understandable information on leasing transactions, including the obligations and expenses of the lessee, and the receivables and revenue of the lessor. The boards have a difficult task, but we encourage them to look closely at two issues: first, whether the leasing proposal is sufficiently aligned with the ongoing review of revenue recognition—these areas are interrelated; and second, whether they have adequately distinguished leases from other types of contracts (so-called executory contracts) which, under current standards, generally are not recognized in the financial statements at all.”
The SEC estimated the undiscounted value of future lease payments among U.S. listed companies alone at more than $1.25 trillion in a report issued in 2005—an amount greater than the gross domestic product of many countries. Globally, the figure is far greater.
While there are legitimate tax and legal advantages to lease financing, too many transactions have been structured for the purpose of arriving at a desired accounting treatment, Grant Thornton noted. The current financial statements do not present a complete and transparent financial picture. Clearly there is a need for better disclosure about leasing arrangements and similar contractual commitments.