The words, uttered three years ago at a Canadian event by the chair of the International Accounting Standards Board, would seem a simple enough wish. But Tweedie is still flying the globe, for the most part, on planes that aren't found on carriers' financial statements. As he pointed out in 2008, most are financed through operating leases, which don't have to be recorded on the balance sheet. As a result, airlines haven't had to include them on their balance sheets -- so far.
Now, though, that appears likely to change. The Financial Accounting Standards Board and the IASB are jointly working to update lease accounting standards. According to the , the agencies will issue final accounting standards for leases by the middle of this year; this follows the release of an exposure draft and a comment period last year. Under the proposed standards, companies' balance sheets will have to reflect their lease assets and obligations, says Josh Leonard, a partner with Deloitte's lease advisory practice. "They will have a right-of-use asset and an obligation to pay rent."
The primary driver behind the change is a desire for greater transparency. "Today, there are a lot of non-cancelable lease assets that are not on (companies') financial statements," says Terry Warfield, professor of accounting at the University of Wisconsin-Madison. While companies include information on lease obligations in their financial statements' footnotes, the obligation to pay rent over the terms of a lease is not really shown, Leonard notes. Similarly, most landlords' balances sheets lack information on the income they can expect to receive from their leases
"I agree with the move to put the assets on the balance sheet," as that provides a more accurate picture of the company's obligations, says John (Jack) Hinnendael, group controller with ITW Ark-Les, a supplier of engineered user interface solutions. He notes, thought that ARk-Les leases very little, so the change would have minimal impact on him.
Judging from a few of the in response to the exposure draft, most financial executives recognize the benefits of providing complete, transparent information to investors, creditors and other users of financial statements. "...we understand and agree with the conceptual changes that would ensure that all the rights and obligations arising under leases are recognized in the statement of financial position..." wrote John Stantial, interim vice president and controller, and Maria Romanovska, financial reporting specialist with United Technologies Corp., based in Hartford, Conn.
The change could be significant. found that the total value of the leases that would land on the balance sheets of S&P 500 could hit $549 billion. At 34 companies, operating lease liabilities would exceed one-fourth of their market capitalization.
So, even as CFOs support the changes, many are worried about the potential implications, Leonard says. For instance, lessees' balance sheets will reflect larger amounts of both assets and liabilities, as they'll need to incorporate the present value of their obligation to pay rent, along with their right to use the leased asset, over the course of a lease. The changes to these balances could lead a company to inadvertently violate a loan covenant. In of several hundred lessees and lessors, more than two-thirds said that the new accounting standard would significantly impact their debt to equity ratios.
Of course, lessees aren't the only parties affected. Some lessors are concerned that more lessees will opt for shorter leases, in an effort to keep their balance sheets from ballooning due to the discounted lease obligations that now will appear on them. In fact, four in ten respondents to the Deloitte survey predicted a shortening of lease terms. Or, current lessees may opt to simply purchase more assets than they do now.
In the FASB comment letters, a number of companies also expressed concerns regarding the proposed treatment of contingent rent. Many retailers, for instance, pay a base level of rent along with some percentage of their sales. As outlined in the exposure draft, these contingent rental payments would be estimated and included in the measurement of assets and liabilities arising from a lease. For a retailer like Williams Sonoma, that would require projecting sales for up to 20 years and across more than 600 stores, wrote controller Judith Whalen. "Including contingent rentals based on sales or other highly subjective criteria would significantly increase the complexity and burden on certain preparers," she stated.
Even firms whose leases are more straightforward face daunting administrative challenges. For each lease, they'll have to assemble an accurate record of the terms, and calculate the present value of the payments. "If you have 10 leases, it's not a big deal. If you have 4,000, it's a big deal," Leonard notes. The job will require resources from across each company, including accounting, IT, and real estate. Perhaps not surprisingly, just seven percent of execs are confident that their firms are either extremely or very prepared to comply with the new standards, the Deloitte survey found.
What's more, it's not yet clear exactly how the new standard will look. The move to include all leases on the balance sheet likely will remain, estimates Fred Gil, senior technical manager with the AICPA's accounting standards group. However, "the details will change," he adds. For instance, the way in which a lease's interest expense pattern is recorded may change.
At the same time, even if FASB and IASB maintain their current timeline and issue a new standard by mid-year, it's not known just when the changed rules will go into effect. Although it may be several years out -- say January 1, 2014 -- companies need to get to work soon, as they'll have to include results for 2012 and 2013 with their 2014 statements, Leonard points out.
That means results for those years also will need to be calculated under the new standard. "Once the standard is issued, the gun goes off," he says. "You'll need to get the resources and technology and figure out a plan to get this calculated."