US Industry Warns Against Lease Accounting Proposals

by Glen Shapiro, LawAndTax-News.com, New York

23 February 2012

A coalition of several leading non-profit and commercial organizations, including the US Chamber of Commerce, has released a report warning against the introduction of the International Accounting Standard and the Financial Accounting Standard Boards' proposed lease accounting standard, noting the significant detrimental impact it would have on the United States economy.

The study, 'The Economic Impact of the current IASB and FASB Exposure Draft on Leases', specifically examines the impact the proposed standard would have on job creation, the health of the US real estate sector and US publicly-traded companies.

Based on a best case scenario, the report's findings say the standard would:

• Increase the liabilities of US public companies by USD1.5 trillion;
• Increase costs to US public companies by USD10.2bn annually;
• Potentially lead to job losses of over 190,000;
• Reduce US household earnings by USD7.8bn annually; and
• Lower the US GDP by USD27.5bn annually.

Under the proposals, the existing distinction between capital and operating leases would be eliminated and replaced with a single method of accounting that would treat all leases that exceed one year as capital leases. To accomplish this result, lessees would create a notional asset on their balance sheets reflecting their “ownership” of the right to use the leased asset. They would also record a corresponding notional liability derived from the computation of the present value of the expected lease payments (along with several other assumptions).

Introducing its report, the coalition urged standard setters to conduct a comprehensive examination of the costs and benefits of the introduction of the standard. It emphasises that failure to fully understand the economic ramifications of the accounting changes or to address the issues raised in the report, may harm businesses that own, invest, or rent commercial real estate or use leases for other purposes from office equipment to construction machinery, with wider implications for the recovery of the US economy at large.

“Thoroughly vetted and sound accounting standards are needed to create certainty in the marketplace for investors and businesses alike,” the Coalition's report urges.

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