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Moody’s Investors Service plans to update how lease obligations factor into its credit ratings as public companies prepare to include those costs for the first time on their balance sheets next year under new accounting rules.
Moody’s released this week the proposed changes to its lease methodology for feedback from stakeholders.
The change in the accounting standard will require companies to list operating lease liabilities on the balance sheet for the first time—and for some companies that could total billions. The goal is to give investors more accurate information about a company’s lease obligations.
Under the proposal, Moody’s would rely on the lease liability calculation provided by companies, rather than its own estimate.
“The new accounting will be a much better estimate than what we can come up with today,” said Kevyn Dillow, vice president and senior accounting analyst with Moody’s based in New York.
The ratings agency currently relies on the footnotes in the financial report to gauge how much a company might owe in leases and ultimately how that might affect the company’s ability to borrow or repay credit, Dillow said.
“The accounting is catching up to the way that we have been viewing leases,” she said. “There will be a more consistent view of the lease obligation.”
Moody’s will adjust the new figures to balance out the differences between U.S. and international accounting standards, she said. The differences are mostly minor, but the U.S. standard distinguishes between finance and operating leases while leases under International Financial Reporting Standard 16 use a single lease-accounting model.
The new accounting standard isn’t expected to have much effect on ratings because the underlying economics of a company isn’t changing, Dillow said.
S&P Global Ratings declined to comment on whether its methodology might change. However, in documents previously released by the ratings agency, the new standard was expected to generally matchup with the agency’s formula and that it would use the new lease liability figures in its analysis.
Fitch Ratings told Bloomberg Tax that the agency uses annual rent expenses included in financial statements to determine debt adjustments. “As such, changes to lease accounting rules shouldn’t have a material impact on Fitch’s adjustments,” the company said in an email statement.
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