Global accountants stick to plan to get leases on balance sheets

Thu May 16, 2013 7:00am EDT

* Accountants issue revised draft, still want leases on balance sheets

* Dual track approach for equipment, property leases

* Industry criticises cost of planned rule change

* Rule may not come in until 2016 due to corporate opposition

By Huw Jones and Dena Aubin

LONDON/NEW YORK, May 16 (Reuters) - Company balance sheets could swell by trillions of dollars under an international plan being pursued by two accounting bodies to show more clearly the cost of leasing everything from photocopiers to property.

If the revised draft the International Accounting Standards Board and U.S. Financial Accounting Standards Board issued on Thursday is adopted, tens of thousands of firms worldwide will have to add all leases over a year to their balance sheets.

The proposals signal their refusal to back down further in the face of opposition from companies, who worry that bigger balance sheets will make them look more indebted and bump up their borrowing costs.

The bulk of leases are currently only mentioned in footnotes.

"The proposal is responsive to the widespread view of investors that leases are liabilities that belong on the balance sheet," FASB Chairman Leslie Seidman said in a statement on Thursday accompanying a revised draft of the rules.

The reform, which may not take effect until 2016 in view of the corporate opposition it faces, is part of efforts to align international and U.S. book-keeping rules so markets can compare firms more easily and get a clearer view of their liabilities.

"At present, investors must take an educated guess to determine the hidden leverage from leasing by using basic disclosures in financial statements and applying arbitrary multiples," IASB chief Hans Hoogervorst said in the statement.

More clarity on lease liabilities could break some corporations' loan covenants, which are linked to balance sheet size limits, or even trigger credit rating changes, accounting experts say.

And the sums involved are huge.

In Europe, outstanding leases totalled $928 billion in 2011, according to Leaseurope, which represents over 90 percent of the European leasing market.

In the United States, companies have about $1.5 trillion of operating leases according to a study commissioned by the U.S. Chamber of Commerce and real estate groups.

The two boards have backed down from their original plan to treat all leases in the same way, and confirmed on Thursday that they would pursue a "dual track" approach to distinguish between property and equipment leases, as reported by Reuters.

Instead of the current "straight line" rental expense that stays the same throughout the life of a lease, the new standard would treat most equipment leases like loans, with the highest costs in the earlier years.

Property leases would still be treated as a straight line expense, but there is no change to the basic principle that all types of leases longer than a year must be put on balance sheets.

Industry bodies had been hoping for further concessions.

"Leaseurope consider that they will not bring about a sufficient improvement in financial reporting to warrant the cost and complexity of changing the existing approach," the industry body said.

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