ELFA: Lease Accounting Proposal Could Negatively Impact Economy

DEC 7, 2011 - 8:15 am

A proposal to change how leases are accounted for on corporate balance sheets could have a widespread, detrimental impact on the U.S. economy, triggering a $10 billion reduction in gross domestic product and 60,000 fewer jobs by 2016, the Equipment Leasing and Finance Association announced, citing a new study.

Conducted by information and analysis provider IHS for the Equipment Leasing & Finance Foundation, “Economic Impacts of the Proposed Changes to Lease Accounting Standards” is the first independent study to substantiate how the complex proposal might affect an already fragile U.S. economy.

The new study finds that under the lease accounting proposals being considered by the IASB and FASB:

U.S. companies would add an estimated $2 trillion to their balance sheets–an 11% increase in total debt. Higher debt-to-equity ratios can increase volatility in corporate earnings and companies’ ability to secure financing, among other consequences.

U.S. companies could experience a 2.4% reduction in pre-tax net income in the first year of the new accounting rule.

The cost of debt could rise through higher interest rates–every 50 basis point increase would trigger a $10 billion reduction in GDP and 60,000 fewer jobs by 2016.

The proposal would cause a permanent reduction of $96 billion in the equity–net worth–of U.S. companies, a sizable erosion of shareholder ownership value.

ELFA, in advocating to protect economic and financial interests of U.S. businesses, proposes that FASB and IASB include four key considerations in their revised lease accounting rules.

1. Recognize that there are at least two types of leases. Retain the time tested distinction between capital leases and operating leases and retain straight-line expense recognition for the leases that are now considered operating leases.

2. Offer relief from the complexity and compliance burden of the proposal in areas such as transition, adjustment of estimates in the lease term, accounting for variable rents and disclosures.

3. Preserve the netting in leveraged lease accounting that allows lease providers to reduce the cost to lease users by hundreds of basis points.

4. Preserve sales-type lease gross profit recognition that allows captive companies to charge lower rates (as much as 100 basis points).

“There are many benefits to leasing, and the primary reasons to lease equipment will remain intact under the lease accounting proposals, from maintaining cash flow, to preserving capital, to obtaining flexible financial solutions, to avoiding obsolescence,” said ELFA Chairman Crit DeMent, chairman and CEO of LEAF Commercial Capital. “However, the financial burdens imposed by the standards under consideration are the last thing American businesses already struggling to regain their footing in a challenging economic landscape need. We urge the Boards to reconsider some of the more onerous and burdensome proposals under consideration to minimize the negative financial impact on businesses.”

To read additional findings from the study: click here.

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