Equipment Leaser, Other Experts Detail Concerns With Leases Proposal

By Steve Burkholder

 

NORWALK, Conn.--A panel of lease accounting experts on June 27 cited improvements to previously proposed dramatic rule changes on leases , but raised concerns--including some significant ones, in the eyes of a delegate from equipment leasers--that are expected to lead to enhanced efforts to further change the proposed standards.

“There's going to be front-loaded costs. There's going to be loss of equity. There's going to be complex deferred tax accounting,” Bill Bosco, chief of a firm that has advocated for the Equipment Leasing and Finance Association, said about potential impacts on equipment leasers of the accounting proposals during a two-hour webinar co-sponsored by Bloomberg BNA and ELFA.

At issue are pending, far-reaching lease accounting proposals of the Financial Accounting Standards Board and the International Accounting Standards Board.

Issued in May, the draft standards represent revisions, in FASB's case, of a much-criticized proposal issued in August 2010. The month-old proposals would require many more lease-related items that are currently off-balance-sheet to booked as assets and, more disagreeably for lessees today, as liabilities where none have been reported before.

The draft standards are expected to have huge impacts on leasing companies dealing in airplanes, trucks, seaborne container freight, and railroad cars, along with real estate-related firms, retail chains, and banks, among others.

For years, the Securities and Exchange Commission, along with investors, has suggested a need to devise improved accounting standards to have amounts stemming from leasing transactions be placed on balance sheets.

“There's going to be overall complexity,” Bosco, chief of consulting firm Leasing 101, added. “But I do not think we could capitalize leases without expecting there to be complexity for lessees.

“That is a necessary evil to get to the objective of the SEC, and that is to put on balance sheet an accurate, consistently applied calculation of a value of operating leases,” he said.

Letter From Corporate Groups

Comments by Bosco and the webinar's moderator, Ralph Petta, chief operating officer of ELFA, suggest that FASB and IASB should be prepared to receive scores of letters outlining concerns and criticisms aimed at the proposals that have been long in the making.

That prospect was reinforced by the sending of a June 26 letter to the boards by 30 trade and corporate organizations and one insurance-related consulting firm.

Among the groups signing the letter were ELFA, the U.S. Chamber of Commerce, The Financial Services Roundtable, National Association of REALTORS, American Trucking Association and the National Business Aviation Association. The consulting firm Barnert Associates also signed the letter.

“We have substantial concerns regarding the need for the proposed leasing standard, the process used to develop the proposed leasing standard, as well as concerns about the proposal itself,” the groups and firm stated in the letter.

FASB and IASB have said that the standards are aimed at increasing much needed transparency and comparability in an area of financial reporting long marked by shortcomings and structuring.

At a New York conference in May, the SEC's chief accountant had relatively positive preliminary words for the proposals. “From my perspective, these are important improvements,” said Paul Beswick, who noted that he spoke for himself and not for the agency or its staff.

“I think it's time that we start getting leases on balance sheets,” he said May 2 at Baruch College.

Big Changes, 'Huge Task.'

“From an operational perspective, this is going to be a huge task, a whole new world for operating lease lessees, especially those that have variable rents, those where there are residual guarantees and where there are options,” Bosco said in the BBNA-ELFA webinar after sounding cautionary notes about proposed changes in reporting of sale-leaseback transactions.

“Transition is going to be a major project,” he added.

Speaking about relatively small-scale leasing arrangements and capitalization thresholds to prevent the recording of liabilities, John Bober, a managing director and the global technical controller at GE Energy Financial Services, urged listeners to the webcast to give some thought to “how do you make this thing operational and are some of the proposals that the boards have put in there” actually operational.

“Because, at the end of the day, what we need is a standard here that can be applied in a rigorous reporting environment in the United States to transactions that are both relatively small and also big-ticket at the same time,” said Bober.

He prefaced those comments by suggesting that lessors and lessees, in applying the planned accounting prescriptions, should weigh whether they could be applied “at the transactional level.”

Bober raised a question that also has been raised - and often coupled with criticism - by corporate groups, such as those that signed the June 26 letter to the accounting boards: Do “the costs of the change” potentially outweigh the benefits that would result from use of the proposed rules?

That question is likely to be addressed in myriad letters sent to FASB and IASB in the next several months.


The FASB proposal on leases is available at http://www.fasb.org.