IASB: Blind to the European Banks Capital Crisis

by Bill Bosco

Bill Bosco is the principal of Leasing 101, a lease consulting company. Bill has over 37 years of experience in the leasing industry. His areas of expertise are accounting, tax, financial analysis, structuring, pricing and training. Bosco has been on the ELFA accounting committee since 1988 and was chairman for 10 years. He is a frequent author and speaker on leasing topics. He has been selected to the FASB/IASB Lease Project working group. He can be reached at [email protected], www.leasing-101.com or 914-522-3233.

Leasing 101 Principal Bill Bosco discusses the IASB’s apparent blindness to the European bank crisis and asks the ever-important question: Is it important that lease accounting reflects legal reality?

On January 9, 2015 Santander bank raised $8.88 billion by issuing stock and cut its dividend by 66% to address regulatory capital issues. The bank’s shares have fallen 29%, resulting in a loss of $33 billion in market value. Santander has $1.2 trillion in assets — its long term capital plan is to maintain 11% capital against assets.

Capital is very costly to banks who are struggling to achieve returns on equity that are attractive to investors. Back in the heyday, banks returned 15% to shareholders on capital ratios as low as 4% of total assets. Do the math and add heavy-handed bank regulations and you can see what banks are up against.

I pity the IFRS-land banks as the IASB lease project is chugging along with a 2018 likely implementation date. The IASB is stuck on the belief that an executory operating lease creates debt and an asset like any other asset. Bank regulators currently don’t count an operating lease as an asset needing capital.

The IASB also imputes interest on the so-called operating lease debt that front ends lease costs eating into reported capital. Add that up and it means that the “paper” assets and accelerated costs create a new capital need where nothing has changed but the opinion of the IASB. That new accounting theory is going to cause IFRS banks to raise capital. Accounting does matter. Fortunately for the U.S. banks, the FASB does treat the capitalized operating leases in the way bank regulators view them.

When implemented, the new lease rules will add an estimated $2.3 billion in operating lease assets to Santander’s balance sheet and will front end an estimated $24 million in lease costs in the year of implementation. That means there will be a new capital need of $275 million. The IASB must think that is not material, but they are not running a bank in these troubled times.

What you think — is it important that lease accounting reflects legal reality?

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