Lease Accounting Rules Raise Ire Down to the Wire

Ahead of a key deadline for comments on a new lease-accounting proposal, more discord over the rules surfaces. Equipment lease- financing firms won...
Kathy HoffelderSeptember 9, 2013

As the deadline for comments on lease-accounting rules approaches, equipment lease-financing companies and trade groups are making last-ditch efforts to fight the proposed converged accounting standards.

The Equipment Leasing and Finance Association (ELFA), one of the strongest opponents of the proposed rules to converge lease accounting, will be issuing a response this week before the September 13 deadline set by regulators for comments on an exposure draft on lease accounting. ELFA had recent meetings and phone calls with the Securities and Exchange Commission, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which drafted the proposal (Leases Topic 842) last May. The draft is a revision to a 2010 proposal.    

To Ralph Petta, chief operating officer of the ELFA, it’s important for the organization to make its members voices heard by FASB and the IASB. “We are trying to make sure businesses around the country in the United States have access to the leasing product, to the equipment finance product. And whatever the standard-setters do in Congress, we are trying to ensure that they don’t try to put a chilling effect on the ability of businesses to do lease transactions,” says Petta.

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“Small and midsize businesses rely on leasing to acquire assets,” he adds, noting that if they cannot borrow money for something they will lease it. “While we don’t think the accounting is going to be the death knell for the industry, in certain markets it will have an impact.”

For small-to-midsize enterprises, it’s crucial, he says, that if the leases are being put on one’s balance sheet, companies need to label the what it really is in substance. “In the U.S. an operating lease is an intangible contract; a capital lease creates a tangible right where you own the equipment; the liability in a capital lease is true debt, whereas the accounting construct of a liability in an operating lease is not true debt,” he said, adding that for the regulators to make that distinction clear “is all we are asking.”

But FASB and IASB say that they drafted the proposal because the current way of accounting for leases isn’t helpful to users of financial statements. For one thing, the standard-setters say that lessees currently don’t have to recognize assets and liabilities arising from operating leases, and they should. Instead, the boards are proposing a single method of accounting by lessees that would recognize the assets and liabilities arising from all lease contracts on company balance sheets.

Other players are demanding a better classification system. Bill Bosco, principal of Leasing 101, a leasing consultancy, recommends segregating operating leases from capital leases and reporting them on the balance sheet as either tangible assets or intangible assets and as either debt or non-debt liabilities. 

More than sixty letters commenting on the proposal, the majority of which oppose it, have poured into the FASB. That follows the more than 700 that were sent in response to the 2010 release.

Rodney Hurd, CFO of Bridgeway Capital Advisors, a provider of equipment financing, says the proposal does not deliver improvements to the existing accounting for leases. And since what investors may want to see in lease accounting differs from what an analyst may want to see, he says accounting for leases should be kept simple, with more disclosures in footnotes.“When you’re dealing with public companies, you can go to them and get that information.”

Others agree. Jonathan Albin, chief operating officer of specialty-finance company CG Commercial Finance, says companies that lease equipment are concerned about using the proposed accounting standards and calls compliance with the standards “operationally burdensome for customers.” It’s difficult to go back and apply the new rules to leases that were structured and accounted for under the existing standards, which the rules would require, he adds.

“We just came out of a financial crisis where capital was extremely scarce. Companies are now beginning to catch up to much delayed additions and replacement of capital equipment,” says Albin. He believes the proposed accounting standards, if implemented, would disrupt the capital markets and reduce access to financing, since the new standards could end up altering businesses’ credit classifications. And that, in turn, may require them to seek more expensive alternative-financing solutions.

FASB and IASB, for their parts, plan to review the comments and host a series of global round tables beginning on September 10 in Sao Paulo, followed by meetings on September 16 in London, September 23 in Norwalk, Connecticut, October 3 in Los Angeles and October 4  in Singapore. The boards plan to make a final decision on the proposed rules for lease accounting during the first quarter of 2014.

FASB may have its work cut out for it. The board’s own Investor Advisory Committee, in fact, came out against the proposal in August. FASB is still in the process of gathering input from different groups of stakeholders and will carefully consider the feedback provided by the IAC, according to a FASB spokesperson.

But converging with the IASB’s lease-accounting could still be difficult. Unlike FASB’s IAC, the IASB says its Capital Markets Advisory Committee strongly supports the lease accounting proposal. And differences between equipment leasing in the United States and other parts of the world will likely always remain. “Outside of the United States, they don’t have the used-equipment market. They tend to want things new, and not used as much as they do in the U.S.,” says Hurd, who believes that may make it difficult to ultimately converge lease accounting on a global basis.