Grant Thornton Supports Lease Accounting Overhaul

Summary

 

If they do not already do so, analysts need to begin proactively adjusting their models to reflect the assets and liabilities underlying “operating” leases onto the books of the companies they follow.  It is no longer a question as to whether many current operating leases will go onto the books, its merely a question of when and how many!

Analysis

As a former Assistant Chief Accountant in the SEC’s Division of Corporation Finance, I can attest to the fact that there is probably no area of the current accounting literature that is disliked more by the SEC’s accounting staff than lease accounting (i.e., SFAS 13 and related pronouncements).  Additionally, as a technical accounting consultant, I can further attest to the fact that companies in need of facilities and equipment routinely structure related transactions within a cat’s whisker of the bright-line triggers within the lease accounting rules to avoid on-balance sheet “capital” lease treatment.  As a result, most companies are able to ultimately characterize the vast majority of their leases as off-balance sheet “operating” leases, whereby they merely record periodic rent expense.  In short, with a tweet here and a tweet there, a company with savvy accounting advisors can avoid booking millions, if not billions, of assets and liabilities. 

 

As to which “operating” leases will ultimately be required to be reflected on the books, that is a difficult question to answer from a purely quantitative perspective.  However, it is safe to assume that the SEC and FASB, consistent with other more recent changes in the accounting literature, are going to qualitatively focus on which party, the lessor or the lessee, primary benefits from the underlying asset over the majority of its estimated useful life.  If a company is deemed to be the primary beneficiary, on the books it will likely go!  And its about time!!!