Lease Accounting: Looming Changes in the Air

By Tina Lazaroff, CPA, Partner
tlazaroff@srgcpas.com

The Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) are proposing dramatic changes to lease accounting rules that would virtually eliminate operating lease accounting treatment.  The intent is to align U.S. lease accounting with international practices and to ensure that assets and liabilities arising out of lease transactions are fully recognized in an organization’s financial statements. The argument for making the changes is that leases represent a significant liability, and this liability should be recognized on the organization’s balance sheet.

The Securities and Exchange Commission estimates that the accounting changes would lead public companies to put $1.3 trillion in leases on their balance sheets. The scale and significance of these changes will vary from organization to organization, depending on a variety of factors. For privately held firms that generate capital internally and seldom need to seek outside capital, the impact may not be significant. Firms that already own much of their real estate and large equipment, may not see a serious impact.  However, for some manufacturers, retailers, service providers and other businesses that lease multiple locations and/or heavily finance their operations and capital expenditures, the impact could be huge.

How these changes will impact ratios that measure the effective use of capital and indebtedness is what concerns both the real estate industry and many other businesses. With few exceptions, return on assets and return on investment will decrease, and debt-to-equity ratios will increase, sometimes exponentially. Many bankers I have spoken with in the past few months do not know how the banking industry plans to respond to these changes.

It is anticipated that the new lease accounting standards will be issued in 2012 with an effective date not likely before 2015.

If you need help navigating how the new lease changes will affect your business, please give me a call at (818) 995-0090 or email me at tlazaroff@srgcpas.com.

 

August 8, 2012 Posted in Accounting, Business