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Investors, Executives Can’t Agree on Lease Accounting Changes

February 3, 2014

Financial executives and investors remain at odds over the effect the planned changes to lease accounting will have. A Deloitte LLP study found that a large majority of financial executives fear the cost and complexity of adhering to the new standard, which may not be issued until late this year or early in 2015 and may not be effective for another two to three years. For investors, the changes may provide some much sought-after insight about the liabilities assumed by many companies that need capital equipment or real estate to run their businesses.

As the FASB and IASB struggle to finish the planned lease accounting standard, financial executives and investors are at odds over the effect the standard will have.

A Deloitte LLP study released on January 29, 2014, found that 80 percent of 138 executives surveyed online believe complying with the new standard will be difficult. Respondents cited concerns about the complexity of compliance and a lack of confidence in IT systems.

The Deloitte study said that the revised accounting will be “a sea change in practice for businesses that rent equipment or real estate.”

A January 30 report by Fitch Ratings Inc. said that it has been difficult to define the scope of the new rules. The report said some debt-like obligations may still be able to escape capitalization, noting that service contracts and leases of 12 months or less will remain off of company balance sheets.

“It is a big hit to the way we look at things, to the way financial statements are being done,” said Robert Pliska, managing director with Sperry Van Ness/Property Investment Advisors LLC in Birmingham, MI. “It started in 2009, and here we are five years later, and we’re still fighting about how to implement it.”

Pliska, 2013 chair of the Counselors of Real Estate’s Communications Committee, added that “it’s a tough item to consider when you’re making this many changes and causing a lot of accounting that has to be done for the balance sheet.”

Deloitte said companies generally are no more prepared to comply with the new standard than they were two years ago.

Confidence has fallen among real estate lessees, with only 1 percent “extremely” or “very” prepared to comply in 2013, down from 9 percent in 2011.

Deloitte said some of the biggest compliance concerns relate to the effectiveness of IT systems and data quality, particularly at large companies.

Vincent Papa, director of financial reporting standards at the CFA Institute, said respondents to an October 2013 study believe the standard is “a good first step, which would enhance the quality of the analytics.”

The CFA study found that 52 percent of the 288 of the organization’s members polled believe preparers’ cost to implement the standard will be less than those incurred by investors and analysts in estimating leverage while making analytical adjustments.

Nearly half of the CFA survey respondents expect that the cost to implement the standard will be less than the savings lessees will experience from leasing costs they will forgo if they stop engaging in operating leases because they are required to capitalize them. Twenty-nine percent expect implementation costs to be greater.

Sixty-seven percent of the respondents expect companies to continue using operating leases regardless of the planned changes, the CFA study said.

Perhaps the one point investors and financial executives can agree on concerns the benefits of a long lead time before companies have to apply the guidance.

“We’re not totally prepared for it, but if you put enough people on it, you’ll figure it out” Pliska said.

“The actual implementation date would be five years from now if it’s adopted,” Papa said. “One would expect that would be sufficient time for companies to be ready.”