Criticism Mounts over New Accounting Rules for Leases

Companies are pushing back against a proposed overhaul of accounting rules for leases that could add hundreds of billions of dollars in debt to the companies' balance sheets, the Wall Street Journal reports.

In recent days, hundreds of companies and other critics, including big users of leases such as Gap Inc., McDonald's Corp. and FedEx Corp., have sent letters objecting to the proposal to rule-makers at the Financial Accounting Standards Board and the International Accounting Standards Board, which proposed the revamp in May.

The new rules would force banks to recognize many leases on their balance sheets that aren't already there, and change how some companies account for the costs of leases in their earnings. The hardest-hit companies, experts said, would be heavy users of leases such as retail and restaurant chains, airlines and companies that lease office equipment.

But a broad swath of critics, including FASB's own investor-advisory panel, now say the changes are too complicated and burdensome.

"It's way too complex," said David Trainer, a member of the FASB's Investor Advisory Committee, which came out against the proposal last month. The proposed changes "hurt more than they help," said Mr. Trainer, who is chief executive of New Constructs, a Brentwood, Tenn., investor-research firm.

The two accounting rule-makers defend the proposal, and are gathering more feedback about it. As part of that effort, they are holding a world-wide series of public roundtables on the proposal, including one Monday at FASB's Connecticut offices.

FASB Chairman Russell Golden said the board has "received both support and opposition" to the lease proposals. Investors "seem split," he said. The FASB and IASB will take the feedback into account, he said.

Most leases aren't on balance sheets now, and critics of the current rules say off-balance-sheet financing makes companies look less indebted than they really are. The proposals would require companies to add to their balance sheets all but the shortest leases, as liabilities akin to debt.

The proposal would also set up a two-track system for how lease costs should be reflected in companies' earnings. Costs of real-estate leases would be recognized evenly over the term of the lease, while costs of other leases would be more front-loaded and would decline over the lease term.

But there was opposition to the changes from the start. The FASB agreed to issue the proposal only on a split 4-3 vote, with some FASB members believing the changes were too complex or that the benefits didn't justify the costs.

Companies, auditors and others sent more than 450 comment letters to the FASB in the last few days of the public-comment period on the lease proposal, which ended Sept. 13. Many were from companies objecting to some or all of the proposal, and which would be significantly affected if leases were to be added to the balance sheet.

FedEx said it wasn't opposed to adding leases to the balance sheet, but said it opposed the two-track model for the income statement. "We'd like to see them pick one or the other," said Herbert Nappier, FedEx's corporate controller. "It's already complex enough as it is." Gap and McDonald's declined to comment.

The Equipment Leasing and Finance Association is also strongly against the proposal. "We just think they didn't do enough cost-benefit analysis," said Ralph Petta, the group's Chief Operating Officer.

After the FASB and IASB complete their public roundtables on the lease proposal next month, they plan to start considering whether they should make any changes to the proposal around December or January, with an eye toward enacting a final rule in 2014. Mr. Golden, the FASB chairman, said it was too early to say what the boards would do in response to the opposition and other feedback they've received.

Mr. Petta predicted that "most likely what will happen is that there will be some changes," although he said he and other critics didn't expect the current proposal to be scrapped entirely.

Source:  Wall Street Journal at http://online.wsj.com/article/SB10001424052702304213904579091122175205920.html