Treasury & Risk - December 2010/January 2011

PROPOSED ACCOUNTING STANDARDS AIM TO BETTER RECOGNIZE LEASED
EQUIPMENT ON BALANCE SHEETS, A SHIFT THAT COULD HAVE A BIG IMPACT.
Leases on the Books?

HALF A TRILLION DOLLARS. That’s how much Goldman Sachs analysts claim
could be added to corporate balance sheets if a proposed change in lease accounting
is approved by the Financial Accounting Standards Board. The proposal involves the
accounting for some $640 billion worth of leases at companies worldwide, but it has
received surprisingly little attention considering its likely impact, both on companies
that lease substantial amounts of equipment and on equipment leasing firms. The
assets on their balance sheets,
and oil companies don’t include
leased oil rigs. Nor do companies
list lease payment obligations
as liabilities. They provide data
on leases in footnotes to the bal-
ance sheet.

“Even though in some ways
the proposed rule change is just
catching up with what is happen-
ing already as companies explain
these leases in footnotes,” says
Michael Moran, vice president
of the Goldman Sachs Global
Markets Institute, “the numbers
involved are so huge, it’s not
clear how less sophisticated
investors will react to seeing the
much higher liability figures on
balance sheets.”
Sue Liu, manager for financial
and management accounting at
Hong Kong-based Cathay Pacific
Airways, says that requiring
airlines to account for operating
leases in the same manner as
they do financial leases would
give investors a false picture.
“Management does not neces-
sarily enter into operating leases
as a means of financing, but as
a means of managing exposure
to residual value and to benefit
from the flexibility that these op-
erating leases provide,” Liu says.
Instead of clarifying a compa-
ny’s financial picture, the change
would force analysts and banks
to “strip out” the impact of leas-
ing to determine an airline’s real
leverage, she adds.
International Accounting Stan-
dards Board is considering a
similar change.

Currently, most leases are
classified as operating leases
and do not show up on balance
sheets. For example, airlines
don’t record leased aircraft as
The FASB wants all assets
and liabilities arising from lease
contracts to show up on balance
sheets.

Under the FASB proposal, companies would include operating leases as a separate asset, along with property, plant and equipment. Lease payment obligations would be recognized as a liability and carried at amortized cost, with both the asset and liability amounts based on the present value of expected payments over the term of the lease.

The impact of the change, which if approved by the board would go into effect sometime in 2011, would be widespread, since virtually every major company leases equipment.