Companies Facing ‘$3trn Headache’ Due to New Property Lease Accounting Rules
Changes to international accounting standards in relation to commercial property leases look set to leave businesses worldwide facing the prospect of adding $3 trillion to their collective balance sheets in the coming months and years.
That’s according to the estimates of the International Accounting Standards Board (IASB), which is the body responsible for bringing in the new rules, along with the Financial Accounting Standards Board (FASB) in the US.
And while the IASB is convinced that obliging companies to detail property leases on their balance sheets will improve transparency, some experts are convinced that the changes will present major headaches to hundreds of businesses worldwide.
“What we are looking at, now that the IASB and FASB have finalised their respective leasing standards, is nothing short of the perfect storm for corporate reporting,” said Richard Farr, managing director of Lincoln Pensions, told Financial Director.
“We have off-balance sheet leases being brought on-balance sheet through some very questionable and subjective decisions about what constitutes the value of the supposed ‘asset’, at the same time as companies are dealing with massive deficits in their defined benefit (DB) pension schemes,” he said.
“Moreover, all this is happening at a time when the global market is looking decidedly wobbly. This is likely to have an extremely negative impact on many companies’ relationship with their banks and with funders, and is very likely to have a severe impact on corporate credit ratings.”
According to Mr Farr, there is particular scope for companies from within the retail, hotel and airline sectors to be adversely impacted by the changes to international accounting standards.
At the heart of the matter for businesses in these fields is the shift from having property lease liabilities go from being off to on their corporate balance sheets, which might not initially be a major problem but could soon become just that in a situation where cash flow difficulties have emerged.
“You create a massive funding gap in the accounts which exacerbates the problems of any company that is starting to run into trouble,” Farr said. “The new treatment will make the balance sheet look far worse than it would have before the new standard came into effect.”
It is thought that some of the world’s largest retailers, whose off-book liabilities are worth billions of pounds, could soon see their financial positions made to look much less healthy as they are obliged to detail these liabilities on their balance sheets as a matter of course.
Written by: Steven Jones on Monday 16/05/2016