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Lease Accounting Rules Raise Ire Down to the Wire

Ahead of a key deadline for comments on a new lease-accounting proposal, more discord over the rules surfaces. Equipment lease- financing firms wonder if global convergence can be achieved.

As the deadline for comments on lease-accounting rules approaches, equipment lease-financing companies and trade groups are making last-ditch efforts to fight the proposed converged accounting standards.

The Equipment Leasing and Finance Association (ELFA), one of the strongest opponents of the proposed rules to converge lease accounting, will be issuing a response this week before the September 13 deadline set by regulators for comments on an exposure draft on lease accounting. ELFA had recent meetings and phone calls with the Securities and Exchange Commission, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), which drafted the proposal (Leases Topic 842) last May. The draft is a revision to a 2010 proposal.    

To Ralph Petta, chief operating officer of the ELFA, it’s important for the organization to make its members voices heard by FASB and the IASB. “We are trying to make sure businesses around the country in the United States have access to the leasing product, to the equipment finance product. And whatever the standard-setters do in Congress, we are trying to ensure that they don’t try to put a chilling effect on the ability of businesses to do lease transactions,” says Petta.

“Small and midsize businesses rely on leasing to acquire assets,” he adds, noting that if they cannot borrow money for something they will lease it. “While we don’t think the accounting is going to be the death knell for the industry, in certain markets it will have an impact.”

For small-to-midsize enterprises, it’s crucial, he says, that if the leases are being put on one’s balance sheet, companies need to label the what it really is in substance. “In the U.S. an operating lease is an intangible contract; a capital lease creates a tangible right where you own the equipment; the liability in a capital lease is true debt, whereas the accounting construct of a liability in an operating lease is not true debt,” he said, adding that for the regulators to make that distinction clear “is all we are asking.”

But FASB and IASB say that they drafted the proposal because the current way of accounting for leases isn’t helpful to users of financial statements. For one thing, the standard-setters say that lessees currently don’t have to recognize assets and liabilities arising from operating leases, and they should. Instead, the boards are proposing a single method of accounting by lessees that would recognize the assets and liabilities arising from all lease contracts on company balance sheets.

Other players are demanding a better classification system. Bill Bosco, principal of Leasing 101, a leasing consultancy, recommends segregating operating leases from capital leases and reporting them on the balance sheet as either tangible assets or intangible assets and as either debt or non-debt liabilities. 

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