Anything 30 years old in accounting is ripe for rejuvenation, and anything that old in leasing is ready for rebirth.
With good reason, then, the Financial Accounting Standards Board has added to its agenda a project to reconsider the standards on accounting for leases.
FASB project manager Danielle Zeyher said that the board is concerned that current standards may not communicate all the resources and obligations that arise from leasing transactions in a way that helps investors understand the true economics of the transaction.
"The big concern is that financial analysts adjust companies' financial statements because they don't think those statements reflect all their leasing arrangements," she said. "If their operating leases are in the footnotes, then there's a question about what the company's true obligations are, and whether there are assets that should be on the balance sheet."
Much has changed in leasing arrangements since FASB issued Statement 13, Accounting for Leases, in 1976. The FASB standard and other authoritative guidance are complex and rules-based, attempting to prescribe treatment of leasing arrangements that have evolved beyond - some would say, around - specific rules.
Current standards on leasing require lessees and lessors to report leases as either sales or rentals, that is, as capital leases or operating leases, depending on the extent of the transfer of benefits and responsibilities. A report to Congress issued by the Securities and Exchange Commission in 2005 in compliance with the Sarbanes-Oxley Act warned that leasing arrangements were being structured to abuse that simplistic approach.
"Problems with the all-or-nothing character of the accounting have been magnified because many issuers involved in leases, taking advantage of the bright-line nature of the lease classification guidance, structure their lease arrangements to achieve whatever accounting (sales-type/capital or operating) is desired," the report stated.
Zeyher said that the board will try to do away with the dichotomy of operating and capital leases by establishing a unified model that accounts for all leasing transactions, with possible exceptions for short-term or immaterial leases.
A requirement that more leases be moved to the balance sheet could significantly increase the effective debt of many companies, especially retail stores. Twenty-four of the country's top 40 lessees are retailers.
"The goal of this project is to develop principles that would faithfully represent lease transactions in the financial statement of lessees and lessors and would reflect similarities and differences in the wide variety of leasing arrangements prevalent in today's business environment," said FASB member Leslie F. Seidman.
Seidman said that investors have expressed concern that current standards do not require balance-sheet recognition of significant assets and liabilities arising from leases.
Lease us alone
Bill Bosco, owner of Leasing 101, a leasing consultancy, and a member of the Accounting Committee of the Equipment Lessors Association, is concerned that the board may require all or most leases to be recorded as capital leases, and that the burden of accounting could outweigh the significance of a lease.
"Our biggest fear, from the ELA's perspective, is that the new rule that is being touted as something that simplifies things will actually make it more complicated for companies that lease small-ticket assets for short periods of time," Bosco said. "And when those deals are considered to be leases by the IRS and bankruptcy law, it's going to add extra complexity and extra calculation."
Those rules are far from written, however, as the board is just beginning its research.
Bosco said that the likely changes to the rules will result from changes that have been made in FASB's conceptual framework since Statement 13 was written. That statement assumes that the asset accounted for is the leased asset itself. Today, the right to lease the asset is considered the asset.
FASB is working with the International Accounting Standards Board to develop a common standard that will more clearly reflect lease-related resources and obligations.
The boards hope to issue a preliminary views document for public comment in 2008. They are currently forming a task force to contribute expertise on modern leasing arrangements. A final statement is not likely before 2009.
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