* Overhaul meant to shine light on lease-related liabilities
* Complexity of proposed accounting change undermines support
* Effort to align U.S., international accounting at stake
By Dena Aubin and Huw Jones
NEW YORK/LONDON, May 2 (Reuters) - Corporations may have to shoulder trillions of dollars of new balance-sheet liabilities under an accounting change for leases that is meeting stiff resistance from businesses in a test of international accounting standard-setters' resolve.
Already pared back once to reduce its impact on real estate leasing, a proposed new international lease accounting standard, under development for years, will reach a turning point in May when standard setters unveil a detailed draft rule.
The standard could potentially affect leases of assets ranging from passenger jets and storefronts to cargo containers and photocopiers. But it is unlikely to be finalized until next year, possibly taking effect in 2016 or 2017.
In the meantime, the standard setters can expect to be challenged by an assortment of lease-dependent businesses, such as airlines, restaurants, drugstore chains and other retailers.
Many such companies are accustomed to being able to consign their lease commitments to footnotes of financial statements, where they get less attention than they would if they were included in the balance sheet.
For instance, U.S. retailer Walgreen Co. leases most of its more than 8,000 drugstore properties. The Illinois-based company has $35 billion of operating leases that are not shown on its balance sheet. A Walgreen spokesman declined to comment.
To some accounting experts, putting leases off the balance sheet obscures the portrayal of a company's liabilities.
"Significant reform for lease accounting is crucial for the credibility of all financial reporting and for those who regulate it, use it, audit it and implement it," said Paul Miller, a University of Colorado accounting professor.
Without recognizing leases, he said, "the balance sheet is not complete, and if it's not complete, then it's not useful."
The expectation is that, if it is completed as planned, the standard would force many companies to reflect lease commitments that extend for more than a year on the balance sheet, like debt. Tens of thousands of companies would be affected.
Opponents of the standard question if changing it is worth the effort and the costs it would impose on businesses.
"There should be a cost-benefit analysis that attaches here if we're going to go through this," said Tom Quaadman, a vice president at the U.S. Chamber of Commerce, a Washington, D.C.-based business lobbying group opposed to the new standard.
For investors, such a change could be a shock. More clarity on lease liabilities could conceivably break some corporations' loan covenants or trigger credit rating changes.
The new rule's impact on leverage in banking and retailing would likely be significant, said Peter Hogarth, a partner at accounting firm PricewaterhouseCoopers in London.
The standard is being developed jointly by the Financial Accounting Standards Board, based in Connecticut, and the International Accounting Standards Board, in London.
FASB writes the United States' Generally Accepted Accounting Principles, known as GAAP. IASB's International Financial Reporting Standards, or IFRS, prevail in much of the rest of the world.
Merging GAAP and IFRS has been a goal of standard setters for years and recently was backed by Group of 20 world leaders, but it has proved to be elusive. The lease standard is seen as a showcase meant to prove accounting "convergence" can be done.
Lease accounting has not had a major overhaul in the United States since the 1970s.
Leases were once used mostly by companies unable to afford buying equipment or real estate, but today they account for over a third of capital investment. Leases give companies purchasing power and flexibility in upgrading worn-out or obsolete assets.
In Europe, outstanding leases totaled $928 billion (712 billion euro) in 2011, up from $838 billion(634 billion euro)in 2006, according to Leaseurope.
In the United States, companies have about $1.5 trillion of operating leases, according to a 2012 study commissioned by the U.S. Chamber of Commerce and real estate groups. Real estate leases made up about $1.1 trillion of the total.
Lobbyists expect some sort of new rule to result from the standard setters' efforts, but more watering down seems likely, possibly by raising to two or three years from one year the term of leases exempted from stricter treatment.
IASB and FASB backed down last year from requiring all leases to be treated the same way by agreeing to make an exception for property lease rental expenses.
Peter Cosmetatos, director of finance policy at the British Property Federation, said there was a sense of slowing momentum.
Some regulators said there may not be a converged final standard if it is too complex. At FASB, support is fragile. The proposal cleared the board by just 4-3 in an April 10 vote.
Opponents of the standard include Leaseurope, a leasing industry lobbying group, and a U.S. coalition led by the U.S. Chamber of Commerce and real estate groups.
These opponents have secured allies in Washington. Urged on by lobbyists, 60 members of Congress wrote to standard-setters last year to push them to rethink the rule.
Real estate firms have been opponents, warning that the new standard could undercut a commercial real estate recovery.
Balance sheet debt is not the only worry for businesses. The impact on the income statement and profits is also a concern.
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 higher costs in the earlier years. One important exception to this would be real estate lease costs, which would still be straight-lined.
For instance, an airline that signs a 17-year, $100-million lease for aircraft would see expenses jump by $2.4 million or 26 percent in the first year of the lease, according to data from the Equipment Leasing and Finance Association.
"It has the effect of looking like an increase in the cost of debt to a company," said Bill Bosco, a consultant working for the U.S. Equipment Leasing and Finance Association. "It eats into capital and it reduces earnings."