FASB. IASB. Those eight (8) letters are going to cause a lot of us some grief. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are planning to change the rules, which will make our business profits look very different.
Right now, our leases are not recorded on our books. Oh, sure, the rent we pay each year- those costs decrease our current profits. But, if FASB and IASB have their way, any longer term leases (real estate, construction equipment) will be listed on our balance sheet, as if they were debt. (Short term leases are those of 12 month duration or shorter.) That means that our equity will be reduced by the value of our leases. (The rule was again proposed on 16 May 2013.)
Our aviation clients who finance their aircraft through leases will be negatively impacted. Restaurants that lease real estate at multiple locations will have their worth decreased. Right now, some $ 640 billion or more of leases are not accounted for on the balance sheets of companies.
These regulatory authorities plan to make us list our real estate over the life of the lease. But, other items we lease will be front-end loaded- higher costs during the first years of a lease and lesser amount as the lease ages.
This is not the first dance for this proposal. They tried this 3 years ago. You can decide if it was the 800+ letters of complaint they received or the fact that they tried to rethink the concept. Because their original proposal included all leases- not just the longer term ones.
The comment period ends in 100 days or so- on 13 September. That way FASB and IASB can issue their final rule in 2014- but the good thing is that I will be an ’eminence gris’ by the time the rule fully applies in 2017. So, my clients will be less likely to argue with me. (Yeah, right!) Because we all know that we structure those leases to keep that debt from impacting the worth of our companies…