* Overhaul meant to shine light on lease-related liabilities
* Complexity of proposed accounting change undermines
* Effort to align U.S., international accounting at stake
By Dena Aubin and Huw Jones
NEW YORK/LONDON, May 2 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
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."
ONE-YEAR CUT-OFF SEEN
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
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.
FOR SALE OR LEASE
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."