New lease accounting proposal: what it means and what companies can do to prepare.

Author:Day, Rick

Though the vast majority of accounting changes tend to I fly well under the radars of most in the business community, that was not the case last month when the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released their second round of proposals on lease accounting. Businesses of all types and sizes have been waiting for--and in many cases, were actively involved in trying to shape--the proposals for several years.

The story was subsequently covered at length by the major news sources, such as The Wall Street Journal, The New York Times and a host of other major business publications--and in the weeks since the proposal's release, commentary continues to be published.

Why the unusual storm of interest? Simply put: the potential impact of the proposal is enormous and the changes will be felt across every industry and by companies of all sizes. If the proposal becomes effective, it could realistically result in trillions of dollars in assets and liabilities being added to the balance sheets of U.S. companies.

According to one study last year commissioned by the U.S. Chamber of Commerce and several real estate organizations and conducted by Chang & Adams Consulting, the proposal could increase the liabilities of publicly traded U.S. companies by $1.5 trillion--a sum greater than the gross domestic product (GDP) of more than 90 percent of the countries in the world, according to the Central Intelligence Agency World Factbook.

Compliance costs are also likely to be significant and might strain the resources of smaller and middle-market businesses that do not have the same level of in-house accounting resources as larger companies.

If approved as is, this proposal is not likely to take effect before 2017. However, as the figures above should make clear, the time to become informed about these changes is already here.

Understanding the Proposal

Since the late 1970s, accounting guidance applicable to lessees has generally allowed for many leases to be classified as operating leases, which in turn has allowed them to be kept off of balance sheets. This state of affairs has long been the subject of criticism from regulators, accounting industry commentators and portions of the investor community.

Despite the criticism, the guidance remained unchallenged in an official capacity until nearly a decade ago, when the U.S. Securities and Exchange Commission (SEC) issued a report on off-balance sheet...

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