IASB chair states case for leases on balance sheets

With the comment deadline on the converged lease accounting proposal just days away, International Accounting Standards Board (IASB) Chairman Hans Hoogervorst reiterated his support for the proposal that would put leases on company balance sheets.

Friday is the deadline for public comment on a proposal by the IASB and US Financial Accounting Standards Board (FASB) that has drawn heavy criticism from some in the business community in the United States and has been opposed by FASB’s own Investor Advisory Committee (IAC).

The IAC recommended that the boards increase disclosure agreements about leases instead of placing leases on the balance sheet.

But in a speech Monday at the 2013 IFRS Congress in Berlin, Hoogervorst’s update on convergence projects with FASB included a pointed defense of the lease accounting proposal. He said bringing leases onto the balance sheet will have benefits for preparers in addition to providing information that currently is obscured from investors.

“For many companies, such as airline and railway companies, the off-balance-sheet financing numbers can be quite substantial,” Hoogervorst said. “It has been estimated that the hidden leverage in leases leads to an underestimation of long-term debt by some 20%. So we are not talking about small fry.

“What’s more, the companies providing lease financing are more often than not banks or subsidiaries of banks. If this financing were in the form of a loan to purchase an asset, then it would be recorded. Call it a lease and it simply does not show up on the books.”

Hoogervorst said the boards are aware that preparers would bear additional costs if the new proposal is implemented. But he said the boards have made decisions – such as excluding short-term leases from the standard – to minimise costs.

He said more transparent information on leases could benefit companies themselves, as well as investors.

“I would not be surprised if many CEOs are only vaguely aware of the full extent of the hidden debt in their leasing contracts,” Hoogervorst said. “By making this hidden debt clearly visible, companies might be able to make more rational decisions on capital allocation. Leasing will certainly not disappear. But companies will be able to make better-reasoned decisions between purchasing and leasing.”

Under the proposal, lessees would report a straight-line lease expense in their income statement for most real estate leases. In most equipment and vehicle leases, lessees would recognise a lease as a non-financial asset measured at cost, less amortisation. This would result in a total lease expense that generally would decrease over the lease term.

Hoogervorst also addressed the status of other convergence projects:

• Revenue recognition. The final standard was scheduled to be released in the second quarter of 2013; now it’s due this autumn, according to Hoogervorst. “We are confident we will get it done soon,” he said. “We have taken our time because this is a very important standard. It is about the top line and will affect all companies.”
• Impairment of financial instruments. FASB wants more upfront recognition of expected loan losses than the IASB. Hoogervorst said the IASB received “very broad support” for its latest model. “At the same time, we still hope that the IASB and the FASB will be able to bring their respective models closer together,” Hoogervorst said. “In September, we will have another joint meeting in London, and we will see how far we can get.”
• Insurance contracts. The IASB and FASB have proposals out for public comment that are similar but have some differences. Hoogervorst hopes to finalise the IASB standard in 2014.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.