In his comment letter on the proposal, JC Penney controller Dennis Miller said contingent rent should not be included as part of a lease obligation. Contingent rent was never a "significant item" for the retailer, he wrote, and is not expected to be one in the future. "Including a contingent rent assumption would add a great deal of complexity and the effort required would outweigh any benefit to be derived from its inclusion," stated Miller.

Despite companies' complaints about the difficulty of calculating lease contingencies, some experts believe the numbers already exist in corporate financial systems. "Many companies already have this information, as it is often used for internal budgeting and forecasting purposes, especially if they've entered into contracts with contingencies and extensions," says Barbara Davidson, a technical manager at the IASB. Nevertheless, she appreciates that some companies may have to revisit internal systems and processes to fine-tune the data for financial reporting if the proposed rule is issued in its current form. "For companies with a large number of leases, management will have to consider how to include this information as part of their regular reporting processes," she adds.

A Trillion-Dollar Adjustment?
Berman of Jones Lang LaSalle notes that the investment community has long taken off-balance-sheet leases into account when evaluating a company's risk profile. Rating agencies have always treated leases as capital items and adjusted a company's leverage accordingly; banks have done so, too. Still, the proposed standard is likely to affect thousands of companies around the world. Many companies "will have to adjust their business models to come to grips with the new rules," says Hanson.

Although FASB and the IASB haven't finalized the transition guidance or effective dates of the proposed rule, there are indications that it will apply to existing leases. That could eventually force lessee corporations to capitalize more than $1 trillion worth of operating leases. In a 2005 report, the Securities and Exchange Commission estimated the value of operating leases held by U.S. publicly traded companies to be $1.3 trillion, notes Berman. That number is likely much higher today, she says, considering the number of private-company leases that are not reported publicly and the general growth in the real estate and equipment leasing markets.

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