Lease accounting changes could wipe $10bn off
US GDP and $96bn off the net worth US companies, according to a
study by the Equipment Leasing & Finance Foundation
(ELFF).
The report entitled “Economic Impacts of the
Proposed Changes to Lease Accounting Standards,” was conducted
by information and analysis provider IHS and is the first to
substantiate how the proposal might affect the US economy.
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The study suggests the proposed changes to how
leases are accounted for on corporate balance sheets could have
widespread detrimental effects on the US economy.
The lease accounting changes being mooted by
the US Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) are due for a
second exposure to industry consultation in 2012.
The ELFF is an affiliate of the
Equipment Leasing and Finance Association (ELFA), the US
leasaing trade body.
William G Sutton, president and chief
executive of the ELFA, said: “Leases account for hundreds of
billions of dollars in transactions annually, contributing not only
to businesses’ success, but also to U.S. economic growth,
manufacturing and jobs.
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By GlobalData“It is essential that the Boards carefully
consider comprehensive public input and comment before finalising
their proposal to ensure a workable lease accounting standard.”
Although the effects of the accounting changes
on European leasing have not been subject to a similar study, Mark
Lauritano, vice president of the IHS Global Services Growth
Industries, Americas team, said, notwithstanding the different
taxation rules in Europe, the economic impacts revealed by the
study could occur in any geography where companies are reporting
and utilising operating leases and said the accounting changes
could have a negative impact on the cost leasing in Europe.
IHS compiled the report by combining financial
data for more than 1,800 US companies from ratings agency Standard
& Poor’s CompuStat database with its own proprietary data to
develop pro-forma financial statements to model the impact of the
changes on specific companies as well as major sectors of the US
economy.
The modelling was augmented by a qualitative
review of 105 representative comment letters submitted in response
to the first exposure draft of the proposed rules in 2010 as well
as a general literature meta-study.
Significant results in the study include:
- US companies would add an estimated $2tn to their balance
sheets – an 11% increase in total debt. - US companies could experience a 2.4% reduction in pre-tax net
income in the first year of the new accounting rule. - The cost of debt could rise through higher interest rates and
the ELFA suggest every 50 basis point increase would trigger a
$10bn reduction in GDP and 60,000 fewer jobs by 2016. - The proposal would cause a permanent reduction of $96bn in the
equity of US companies.
The study also found businesses do not object
to having to record leases on their books. Rather, they object to
how the proposal would require them to report lease transactions,
contending that aspects of the proposal are too complex, impose
burdensome regulation on businesses and do not accurately reflect
the economics of the lease transaction.
In order to avoid some of several stumbling
blocks identified in the study, the ELFA called for the FASB and
IASB to make four key changes to the proposal:
- To recognise there are at least two types of leases. Retain the
time-tested distinction between capital (financial) leases and
operating leases and retain straight-line expense recognition for
the leases that are now considered operating leases.
- Offer relief from the complexity and compliance burden of the
proposal in areas such as transition, adjustment of estimates in
the lease term, accounting for variable rents and disclosures. - Preserve the netting in leveraged lease accounting that allows
lease providers to reduce the cost to lease users by hundreds of
basis points. - Preserve sales-type lease gross profit recognition that allows
captive companies to charge lower rates (as much as 100 basis
points).
Crit DeMent, ELFA Chairman and chairman and
chief executive of LEAF Commercial Capital, said: “There are many
benefits to leasing, and the primary reasons to lease equipment
will remain intact under the lease accounting proposals, from
maintaining cash flow, to preserving capital, to obtaining flexible
financial solutions, to avoiding obsolescence.
“However, the financial burdens imposed by the
standards under consideration are the last thing American
businesses already struggling to regain their footing in a
challenging economic landscape need.”
