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FASB releases revised leasing proposals

New leasing exposure draft has potentially huge impact on business, according to Deloitte’s Veronica Poole

Friday 17 May 2013

Cash rebates will create challenges for fund managersNews of a decision by the Financial Accounting Standards Board (FASB) to release for comment a revised exposure draft containing proposals on lease accounting standards has been welcomed by Deloitte.

With the aim of developing a modernised, converged approach to accounting for leases, the new ‘Proposed Accounting Standards Update, Leases (Topic 840)’ would take away distinctions between capital and operating leases, instead demanding all lease assets and liabilities be recognised on a balance sheet.

Important discussion
Acknowledging that there continues to be differences of opinion on which leases should be recorded, Deloitte’s UK national head of accounting Veronica Poole has spoken of the importance of the debate.

She says that, although lengthy, the process leading to this exposure draft was crucial and has potentially far-reaching effects.

“The drive to move operating leases on-balance sheet is based on a rationale that leases are a form of off-balance sheet financing which creates hidden leverage,” she said. “As a result, it is important that regulators and investors are able to understand the true leverage of a business.

“The potential impact on business is huge and is likely to affect important key performance indicators significantly. If the IASB is to win 'hearts and minds' on this one we need a robust and operational solution which provides necessary information to investors in a manner that can be practically applied by companies.”

Fairer representation
Leases with terms of over 12 months will now be treated in relation to the economic benefit of the underlying asset the lessee is expected to consume and will largely depend on the lease’s purpose - be it for real estate or other property and equipment.

At present, operating-versus-capital lease standards have been deemed by many to be failing in offering a representation of leasing transactions and for letting too many lease assets go unrecognised on financial statements.

Mark Beddy, Deloitte Real Estate partner, said: “With the top 50 groups in the FTSE disclosing lease obligations off balance sheet of over £100 billion, and given that much of the UK's £700 billion commercial real estate is leased, these proposals will add many billions of liabilities to property occupiers' balance sheets.”

Copyright Press Association 2013


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