The matter of serious contemplation of significant changes to lease accounting rules arose in 2010, with the IASB (International Accounting Standards Board) and FASB (Financial Accounting Standards Board) proposing lease accounting changes, with an impact on lessee.

Background

The IASB and FASB had, as intent, the objective of having lessees show on their balance sheets greater amounts of lease assets and liabilities than presently exist. This would occur via capitalization of operating lease payments, adding significant leverage to balance sheets. While the objective was transparency, the proposed changes have been criticized for a slew of potential unintended consequences. For example, the effects of capitalizing previously off-balance sheet transactions on company leverage ratios will create the real possibility of an impact on debt covenant compliance for many without any true change in the company’s ability to make good on its obligations.

Further changes affecting lessees were criticized for their stringency, creating more rigorous stressing of company balance sheets than those required in credit rating analysis by the rating agencies. For example, historical behavior would be used to dictate balance sheet treatment, thus turning the potential decision of a lessee to structure post-primary term payments into current liability reflected on its balance sheet. Additionally, a use of the longest possible lease term that was “more likely than not” occurring, a forecast of “most likely” lease renewals, contingent rental payments, residual value guarantees, and purchase options, and rental escalations would all be lumped into a capitalization formula to be applied. READ MORE: http://lendersolutions.equipmentengine.com/2012/06/20/lease-accounting-update-where-do-the-iasb-and-fasb-stand-today/