The Lease Bad Solution
November 18, 2013
One of the world’s biggest accountants, PwC, breathlessly bills it as perhaps “the biggest-ever accounting change.” Businesses that lease property and equipment may soon have to start treating the leases as liabilities on their balance-sheets. All sorts of outfits that make heavy use of leasing — from retailers to airlines and, indeed, professional-services firms such as accountants — may end up looking far more indebted than their books currently show. Opponents of the reform predict dire consequences, for the companies and for the economy.
When a business borrows money to buy a machine, the loan or bond payments are recorded on its books as a liability, and the machine as an asset. If, instead, it leases that machine, it also gains possession of an asset in return for a stream of outgoing payments; but current rules usually let the firm keep both the asset and the liability off its balance-sheet. It has to add only a brief footnote containing scant details of its overall lease obligations.
After the collapse in 2001 of Enron, an energy-trading company that had used accounting tricks to hide its liabilities, Congress asked the Securities and Exchange Commission (SEC) to investigate all forms of off-balance-sheet financing. Four years later the agency issued a report that identified leases as a giant loophole. It estimated that $1.25 trillion of American businesses’ future lease obligations were missing from their published accounts, and recommended that they be included.
Since then, the world’s two main rule-setters for accounts, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), have been drawing up new standards. These require firms to estimate the net present value of their future lease payments — that is, their sum after discounting for the time value of money — and enter it in their books as a liability, rather as if it were a bank loan.