January 27, 2014 / 4:41 PM / in 4 years

Companies set to win lease accounting concessions

LONDON, Jan 27 (Reuters) - A draft rule forcing companies to put leases on their balance sheets is set to be eased after fierce opposition from companies worried that investors would take fright and that loans linked to leverage would be put at risk.

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have proposed a single global book-keeping rule to increase transparency for markets and make it easier to compare firms.

But companies, who often have thousands of leases, say the reform could swell balance sheets by trillions of dollars.

“We have started a re-deliberation and we expect to take the most important decision in March,” IASB Chairman Hans Hoogervorst told a meeting of the board’s trustees and monitoring group of regulators, shown by webstream from Milan.

Leases for items ranging from photocopiers to property are kept off balance sheets and mentioned in footnotes, leaving investors estimating what Hoogervorst calls hidden leverage.

Chief executives are also telling their chief financial officers to keep balance sheets lean by using leases, he said.

“This is going to be very sensitive and very difficult decision-making,” Hoogervorst said.

The IASB will consider how to cut the cost of applying the new rule, such as by limiting “small ticket items”.

“We don’t necessarily want to see every coffee machine and photocopier on the balance sheet,” he said.

A two-model approach has been proposed for leases longer than a year, one for property and the other for equipment which incurs higher costs upfront.

The IASB could opt for one model, ditch plans to reform lessor accounting, and push back the start date for the lessee accounting change, Hoogervorst said.

Many investors make “virtual” balance sheet adjustments to take leases into account, but often exaggerate their impact and therefore some companies will look less leveraged once the reform is in place, he said. (Editing by Louise Ireland)

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