Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Lawmakers Want SEC to Restrict FASB on Proposed Lease Standard

Two members of the House of Representatives, one a Republican, the other a Democrat, want the SEC to curtail the FASB’s work on a planned standard for lease accounting.The lawmakers said that if the SEC won’t impose tight restrictions on the accounting board, then Congress may force it to take action.

Now that the makeup of the 114th Congress is a known quantity, two veteran lawmakers have turned their attention to the proposed lease standard from the FASB and IASB.

The proposed standard will “distort the financial condition of businesses by accelerating expenses over a short timeline rather than reflect expenses over the life of a lease,” said Reps.Brad Sherman, a Democrat from California, and Peter King, a Republican from New York, in a Wall Street Journal opinion piece published November 10, 2014.The changes are scheduled to be finalized in 2015, yet the lawmakers want the accounting boards to do a detailed analysis of the standard’s costs before finalizing it.

If the FASB doesn’t analyze the standard’s costs, then the lawmakers want the SEC to tighten its oversight of the accounting board.If they’re not satisfied with the SEC’s intervention, then Congress may write a bill and force the agency to step in.

“The FASB must adhere to the same requirements of transparency, public input, and cost-benefit analysis the SEC is required to meet,” the lawmakers wrote. “By law the SEC must analyze whether proposed rules will enhance efficiency, competition and capital formation, or whether the costs outweigh the benefits.The lease accounting proposal needs this analysis, but thus far the FASB and SEC have not even begun it.”

“The matter is under consideration,” said a FASB spokesman. “We have had many, many meetings with Rep. Sherman.”

A spokeswoman for the SEC was unable to respond to a request for comment while this story was being written.

“FASB’s first, second, third, and fourth response is to not listen,” Sherman said during a telephone interview. “That doesn’t mean I haven’t gone on to the fifth, sixth, and seventh.Their idea of a public hearing is maybe they fly to one or two cities in the U.S., invite a few people who are already in their Rolodex, talk to them for a little bit, and then go home.”

The proposed lease accounting standard has been a controversial issue for much of the time the accounting boards have been writing it.In the view of Sherman and King, the standard will bring a total of $2 trillion in liabilities onto the balance sheets of companies affected by it and make the companies look too indebted to borrow funds or add new employees.

The standard will “raise the cost of capital for lessees, in the process destroying 190,000 U.S. jobs and shrinking the economy by $27.5 billion annually.And that was the best-case scenario,” the lawmakers wrote.

Sherman and King have been critics of the changes in the FASB’s Proposed Accounting Standards Update (ASU) No. 2013-270,Leases (Topic 842),and the IASB’s Exposure Draft (ED) No. 2013-6,Leases,for some time.They joined other House members who wrote to the FASB in 2012 and 2013 and requested significant changes to the proposed lease standard.

During the interview, Sherman challenged one of the key underlying premises for the lease standard — that the change to accounting will give investors a better indication of the risks companies assume when they purchase large leases for property or equipment.In his view, professional securities analysts who calculate lease liabilities can learn most of the information they want through the footnotes lease customers have to include in their financial statements.

“Since this is almost entirely a balance-sheet rather than an income-statement matter, I don’t think this affects the cursory reader of financial statements,” Sherman said. “If you’re a cursory investor, you look at the chart for earnings per share, you’re done.I don’t know who it is that calculates liability-to-net-worth ratios but doesn’t read footnotes.”

Most recent public statements from FASB and IASB representatives indicate that the standard-setters remain on schedule to release a final standard next year.If the standards are finalized with the provisions that the lawmakers have criticized, it’s not clear whether the SEC or Congress will act to reverse the decision.

Sherman described the SEC as more focused on the bigger issue of its consideration of giving U.S. companies an option to use IFRS and less concerned with the criticisms lodged against the lease standard.At this stage, he hasn’t observed any willingness by his congressional colleagues to weigh in, although the opinion piece alluded to the FASB’s 1973 creation, which came about because of the SEC’s dissatisfaction with the process for writing accounting standards that had been in place since the 1950s.

“This will be a test of our current statutory structure,” Sherman said of the lease standard. “It will be very hard to convince my colleagues to change the structure because it might not work.On the other hand, if this were to go forward and have any measurable and acknowledged adverse effect on the economy, then my colleagues would say this just doesn’t work.”

Tagged with →