by Emily Chasan, Wall Street Journal
The U.S. Financial Accounting Standards Board is set to vote Wednesday on a decade-long overhaul of lease accounting rules that promises to bring as much as $2 trillion in off-balance sheet assets on to corporate books.
Once the rules are finalized, companies are likely to get a better handle on what their balance sheets might look like going forward.
Drugstores, large retailers, restaurants and supermarkets are likely to be most affected under the rules because of significant real estate leases. But lease accounting changes will also have a big impact on banks that lease space for their retail branches, airlines that lease planes and shipping and utilities companies that lease their vehicle fleets.
The FASB says its leasing overhaul aims to “clarify the definition of a lease” and “increase transparency and comparability” among companies by bringing leases on to the balance sheet, according to a meeting handout posted ahead of Wednesday’s board vote.
Companies will likely have to take a fresh look at contracts and talk to lenders about the new look of their balance sheets, if they haven’t already.
“Companies that have been anticipating these changes have found strategic opportunities to restructure the way in which their leases are negotiated in order to mitigate some of the less desirable impacts of these new standards on their financial statements,” said Marc Maiona, founder at adviser LeaseCalcs Inc.
As the WSJ’s Michael Rapoport reports, the rules will be a significant change:
Some of America’s best-known companies—names such as AT&T Inc., CVS Health Corp.and Delta Air Lines Inc.—likely will soon have to effectively boost the debt they report on their balance sheets by tens of billions of dollars. The total possible impact for all companies: as much as $2 trillion.
Within a few years, companies may have to add to their books the cost of many leases for real estate, aircraft and other items that aren’t already carried there. U.S. rule makers are set to vote Wednesday on whether to approve in principle long-awaited new rules requiring companies to make that addition, though the move wouldn’t take effect until at least 2018.
If approved, as many observers expect, that change could dramatically boost the reported leverage for retailers, restaurant chains, airlines, package-delivery companies and other companies that use leases heavily. Companies must already disclose their lease obligations, but it is done in the footnotes to their financial statements; they aren’t included in the balance-sheet numbers to which investors pay the most attention.
Write to Emily Chasan at email@example.com.