As previously reported, the Financial Accounting Standards Board (FASB) has published an exposure draft of proposed accounting changes which will require the recognition of assets and liabilities on the balance sheet of entities to reflect lease obligations.
If approved, the concept of an “operating” lease will essentially be eliminated. Currently, operating leases are not recorded on balance sheets. This results in many investors having to adjust financial statements (using disclosures and other available information) to estimate the effects of lessees’ operating leases for the purpose of investment analysis.
This proposed treatment may have a considerable impact on entities with debt to equity and leverage ratio requirements often contained within lending agreements.
To learn more about this exposure draft and its implications, go to our previously published article by clicking here.
RubinBrown Lease Accounting Survey
In late 2010, RubinBrown surveyed its clients and contacts about their familiarity with the proposed lease accounting rules, their impact, and expectations with regard to financial reporting.
More than 80 people provided their input on the survey. The results are summarized below:
- The majority of respondents indicated some familiarity with the proposed changes to lease accounting. However, a large percentage of respondents have not quantified the impact to their debt covenants. For those that have, a majority of respondents have indicated there will be a negative impact on the covenants.
- A significant majority of respondents have indicated that the proposed changes do not improve the clarity of financial reporting.
- A majority of respondents have indicated that they do have the systems to track the new information, but it will still take a significant amount of time to gather the data and determine the necessary accounting adjustments.
- Opinion is largely split in terms of whether the users of the financial statements will understand the proposed changes to lease accounting.
- A majority of respondents disagree with the proposed changes to lease accounting. Respondent comments generally suggest that leasing is not ownership and the new accounting creates balance sheet distortion. Sophisticated users already understand a company’s lease obligations. Respondents also suggest that operating leases should not be considered any different than other normal operating costs.
Stay tuned for the spring issue of Horizons, which will provide more insight into RubinBrown’s survey results, as well as update you on the latest with the lease accounting proposals.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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