New Leasing Rules Could Add Assets

Accounting changes by FASB and IASB should boost balance sheets, but aren't likely to spawn upgrades in credit ratings, says S&P.
Stephen TaubAugust 3, 2006

The lease-accounting project recently proposed by the Financial Accounting Standards Board and the International Accounting Standards Board (IASB) could result in hundreds of billions of dollars added to corporate balance sheets, according to a new Standard & Poor’s report.

The new lease-accounting standards aren’t likely to spawn a material change in issuer credit ratings, however, because the previously off-balance sheet amounts are already largely factored into current rating, the rating agency said. “We already attribute additional debt for operating leases, and we therefore do not currently envision that there will be a material impact to our issuer ratings merely as a result of adding these obligations to the balance sheet, unless the nature of the lease arrangements or their monetary significance were not sufficiently disclosed or otherwise available to Standard & Poor’s analysts,” said Len Grimando, the firm’s director for financial reporting analysis.

S&P also said that it’s too soon to speculate on what new lease-accounting framework would result from the major project by FASB and IASB. That said, the new regime will require some methodology to record assets and liabilities arising from leasing arrangements as well as to bring many such transactions that are currently treated as operating leases onto the lessee’s balance sheet, according to the agency.

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The report does stress that the project could result in some important rating considerations, with the potential for ratings changes. That potential lies in covenant and regulatory compliance matters, adverse market reaction, changes in business practices, and other factors.

Much more importantly, the project could spur a big shift in corporate culture. “Perhaps the greatest impact of these proposed rules would be the potential for changes in corporate behavior and business practices that such lease accounting changes may cause,” said Neri Bukspan, S&P’s chief accountant, in a statement.

The report also pointed out that changes in business practices would affect lessee-issuers, lessor-issuers, and issuers that service the lease-structuring industry.

The FASB-IASB project could also curb the appeal and change certain structured transactions, according to S&P.