Leasing: Reducing the Game of Hiding Risk

• In Event: Innovative and Emerging Issues 1

Abstract

This study examines the status, resulting implications, and project actions for companies to respond properly to the Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s, (IASB) leases project. Specifically, to address the widespread concern that many lease obligations are not recorded on the balance sheet and that current accounting for lease transactions does not represent the economics of all lease transactions. Decisions on the leasing project reached to date are preliminary. The boards plan to release another joint Exposure Draft [ED] in the first quarter of 2013.

The boards had agreed to require recording “long-term” leases on company balance sheets, but have continued to discuss the classification and pattern of expenses in the income statement. On September 20, 2012 and September 25, 2012, the boards decided to account for some lease contracts using an approach similar to their proposed 2010 Leases ED (Interest and Depreciation), to account for some leases using an approach that results in a straight-line lease expense. Some concerns are that an increase in assets and liabilities may result in debt covenant breaches that will require renegotiation and adjustment.

Analyzing why current FASB/IASB, which have been in place for decades, are not working, we conclude that the standards may not be the problem; rather reliance on the Efficient Market Hypothesis, inadequately trained, unaccountable as well as improperly rewarded and evaluated Loan Officers, and Analysts form a major part of this problem. The current standard allows decision makers to more likely obtain the results they desire for various purposes, versus the real economic reality that exists. That is why there is so much resistance, including politicians to the FASB/IASB proposed standard.

Authors

• Alan Reinstein, Wayne State University

• Gerald Lander, University of South Florida-St. Petersburg