In the first of two articles David Woodroffe examines lease accounting reform
The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have been working on lease accounting reforms since 2009. Despite years of work and two exposure drafts, the boards don’t seem to have got it right yet.
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Now the deadline to submit responses to the IASB/FASB Revised Exposure Draft has passed, it looks like there’s little support for the proposed changes. It’s hard to believe that after all that work, nothing may change. However, it does bring focus back to the primary issue that started all this talk of change in the first place.
Operating leases do not get recorded on the financial statements of lessees; they are only disclosed in the notes. This was the primary reason to look at a change in lease accounting. In looking at the responses, it appears that most are willing to accept that change. What the industry appears to object to is the classification criteria and the change to lessor accounting, which most see as unnecessary and overly complex. So what should lessors prepare for should these changes pass for the leasing industry?
I was surprised to hear at the recent ELFA Lease and Finance Accountants Conference that the board staff had surveyed lessees and concluded that placing leases on the balance sheet would cause little or no change in their leasing activity.
For airline or trucking companies, the reforms may not change the need to lease equipment, but it’s likely to put additional pressure on rates. After all, if it’s going to look like a purchase and loan on the lessee’s books, there’s going to be much more focus on the rate, especially by the stronger credits. This negotiated segment of the leasing industry is probably what the lessee respondents were focusing on when they said that capitalising leases wouldn’t change their leasing activity. But what about the convenience segment of leasing?
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By GlobalDataSeveral years ago, I had the opportunity to conduct a couple of focus groups to discuss leasing. The first was with a group of CFOs from Fortune 1000 companies and the second was a group of purchasing agents from similar companies. We asked the CFOs about leasing in general, and some said they did lease while a few said they didn’t. We asked them about copier leasing and almost all said they didn’t lease their copiers. When we asked the purchasing agents about copier leasing, almost all said they did enter into copier leases, but didn’t really follow the capital acquisition rules for such small items.
This highlighted that there are a lot of leasing transactions, especially with large lessees, that fly under the radar. The CFOs don’t know about it, and the purchasing agents don’t necessarily want them to know about it, because they don’t want to be bogged down with capital acquisition requirements. If the rules change and all these small transactions need to be set up as assets and liabilities, amortised using different methods, it could very well reduce the volume of leasing that these companies undertake. For smaller companies, the requirements could be a burden, and they may look to their lessor for help.
Whether a firm is in the negotiated segment of leasing or the convenience segment, it’s clear these lessee accounting changes will require changes to the way they do business. So the next question is: what can lessors do to prepare themselves for this change? I will share my thoughts on this in the next issue.
David Woodroffe is product director, asset finance at SunGard
