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Global Survey Finds Lease Accounting Changes off Radar for Most

October 24, 2011 (SmartPros) Grant Thornton global business survey finds that pending lease accounting changes are off the radar screen of many businesses worldwide. While changes are long overdue, it is critical that a revised standard reflect the economics of global leasing transactions.

According to research from Grant Thornton’s International Business Report, 54% of global businesses are not aware of, and are therefore unprepared for, one the most significant global accounting changes in the past decade: the virtual elimination of off-balance sheet leases.

Awareness of the change was greatest in the United States. (69%), Mexico (68%) and Chile (63%), and was lowest in mainland China (5%), Denmark (8%) and Turkey (13%).

The survey of 2,800 businesses globally was completed in early September 2011 and also found that, of those who were aware of the changes, 33% thought the change would increase cost and complexity, but only 15% thought it would increase transparency. Only 12% of business indicated they would alter the way they structure leases in the future.

With the IASB and FASB set to re-expose their latest proposals in 2012, it is critical that businesses and investors engage in the process to help ensure these goals are achieved. Grant Thornton stresses the need for businesses to assess the impact of the potential changes and for investors to consider whether the new model will make leasing activities more transparent and financial statements easier to use.

“There is no question that a global review of lease accounting is long overdue,” said John Hepp, a partner in Grant Thornton LLP’s Accounting Principles Group. “The lack of transparency with regard to leases has festered for years, but a major change to lease accounting is a once-in-a-generation event and the IASB and FASB need to be patient to get things right. Our survey findings should give the Boards pause for thought as businesses are seeing costs and complexity in the proposals, but are questioning whether there is any improvement in transparency. Some of the proposals we’ve seen could create a different set of incentives to structure leases to achieve desired accounting outcomes. Change for the sake of change is not the goal, and a rush to a new standard could actually make things worse.”

“Grant Thornton welcomes the Boards’ decision to consult publicly on their latest thinking. We desire a new standard that is practical for business — avoiding undue complexity and excessive estimation uncertainty. Investors need transparent, understandable information on leasing transactions, including the obligations and expenses of the lessee, and the receivables and revenue of the lessor. The Boards have a difficult task, but we encourage them to look closely at two issues: first, whether the leasing proposal is sufficiently aligned with the ongoing review of revenue recognition — these areas are interrelated; and second, whether they have adequately distinguished leases from other types of contracts (so-called executory contracts) which, under current standards, generally are not recognized in the financial statements at all.”

The SEC estimated the undiscounted value of future lease payments among U.S. listed companies alone at more than $1.25 trillion in a report issued in 2005 — an amount that is greater than the gross domestic product of many countries. Globally, the figure is far greater.

Although there are legitimate tax and legal advantages to lease financing, too many transactions have been structured for the purpose of arriving at a desired accounting treatment. The current financial statements do not present a complete and transparent financial picture. Clearly there is a need for better disclosure about leasing arrangements and similar contractual commitments.

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Source: Grant Thornton

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