PREVIEW-Rulemakers plan global overhaul of lease accounting

* Proposal on lease accounting expected Tuesday

* Could bulk up retail, airline balance sheets

* Financial leasing companies also seen impacted

* Implementation still years away

By Emily Chasan

NEW YORK, Aug 15 (BestGrowthStock) – U.S. and international
accounting rule makers are planning to propose an overhaul of
lease accounting as soon as Tuesday, in a move expected to
affect some $1.2 trillion in leased assets.

Traditionally, accounting rules have given companies a lot
of leeway in how they record leases for assets ranging from
store locations and restaurant equipment to airplanes and
machinery. As a result, only certain types of leases appear on
the balance sheet, while a majority of a company’s leases can
often be be kept off the balance sheet and hidden from an
investors’ view.

But the Financial Accounting Standards Board, which sets
U.S. accounting rules, and the London-based International
Accounting Standards Board, which writes accounting rules for
more than 100 countries, will aim to change all that this week
by proposing to bring many of these assets onto corporate
balance sheets.

“It’s something that needs to be done,” said John Hepp, a
partner in accounting firm Grant Thornton’s professional
standards group. “Lease accounting is broken.”

Lease accounting has hardly been changed in the last 30
years, so FASB and IASB have suggested that the changes would
make accounting more consistent and better reflect the
economics behind a lease transaction. It could also clear up
some confusion between similar transactions that are accounted
for as financings or leases.

Under the changes being contemplated, companies would
likely have to recognize a liability for future rental payments
and an asset for the right to use the asset they are leasing.
Many of those leases now are classified as “operating leases”
and exist off the balance sheet.

A FASB spokeswoman declined to comment on the final
proposal, but said that the boards do expect to release it next
week.

“Operating leases have long been considered one of the
major off-balance sheet obligations, so there was this view
that in an operating lease, the lessee has incurred an
obligation and that it should be reflected on the balance
sheet,” said Janet Pegg, an accounting analyst at UBS
Investment Bank.

TO LEASE OR NOT TO LEASE?

Leases are used heavily in industries like retail, where
retailers lease most of their stores and airlines, where
carriers lease most of their planes.

Analysts at Credit Suisse estimated in 2006 that the total
off-balance-sheet lease liability for S&P 500 companies was
$396 billion, with the retail and restaurant industries facing
the biggest liabilities.

While some investors may welcome the change to lease
accounting because it will provide more clarity, many companies
are fearful that the change will force their balance sheets to
balloon overnight, and change all sorts of leverage and debt
ratios, forcing them to renegotiate covenants with their
lenders. Credit rating agencies, for the most part, already
make calculations to compensate for off-balance-sheet leases,
but they could also be changed.

“They’re trying to put the value of the lease on the books
and the obligation of lease on the books,” said Jeffrey Taylor,
an Arizona-based author of two books on lease accounting.

“It doesn’t really change net worth, but I guarantee its
going to change return-on-asset formulas, return-on-equity
formulas and debt servicing,” he added.

The FASB and IASB decided to address both lessee and lessor
accounting as part of the proposal, so companies like CIT Group
Inc (CIT.N: ) and Wells Fargo (WFC.N: ) that operate leasing
companies could also be affected.

“People in the leasing industry think if they can’t keep
things off the balance sheet and operating leases disappear
that its going to devastate not only equipment leasing, but
also real estate leasing,” said Taylor.

“You’ll probably see a lot of people get out of the leasing
business and I do see a consolidation of what kind of equipment
might be leased,… but I can’t see in my mind how changing
lease accounting is going to push a company over the edge.”

Taylor said he would expect lenders to work with companies
affected by the change and that some companies may also want to
restructure some leases due to the change.

The accounting proposal would be open for public comment
and go through a revision process before becoming a formal
rule. The new standard would likely not take effect for several
years.

(Reporting by Emily Chasan; editing Bernard Orr)

PREVIEW-Rulemakers plan global overhaul of lease accounting