Two critical issues are on the table. The integration of international standards with US standards and the upcoming changes in lease accounting.
Leslie Seidman has been appointed the new Chairperson at FASB. She has excellent credentials. She knows FASB (been there since 2003). I liked what she said had to say in an interview with WEBCPA. She seems up to the challenge. Of interest/importance is that Leslie is also the point person on the changes to lease accounting. If she prevails on this one it will prove she is a tough cookie.
I think 95% of the S%P 500 hates the draft plans. The financials totally hate it. Big shots like GE are going to be hurt by this. The accountants don’t like it at all. It makes it more opaque. Why would an accountant want that? Finally, it is not clear to me that the SEC is behind the proposed changes.
I think the new rules make a lot of sense (but I am not an accountant). It relies on a PV method of evaluating a lease. The longer the lease, the greater the impact. A two-year lease has a much smaller balance sheet impact than a thirty-year lease. Seems simple. But it will have very significant BS consequences to some very big players.
Ms. Seidman will have some stiff opposition. I wish her well. Some cut and pastes from the interview:
CPA: Do you think there will be a lot of criticism of the proposal from companies that expect to take heavy losses or who are warning that it’s going to depress the market for commercial property leasing, that landlords are going to have to start re-negotiating leases with their tenants, or tenants with landlords?
LS: I accept that potentially putting amounts on the balance sheet can affect leverage and ratios and things like that. We understand that most investors have been trying to do a pro forma adjustment to put these things on the balance sheet, and so it’s a question as to how big a surprise these amounts are going to be.
BK: Oh boy! I hear all the time that “analysts’ have this figured out and there will be no surprises if and when the standards are adopted. Wanna bet? Here is an opportunity for the analysts. Answer this. If the standards are adopted what is GE’s pro-forma BS? An estimate to the nearest $200b will do. It is currently ~$650b. Will it go to $1 trillion? $1-1/2 trillion?
CPA: How do you think it’s going to affect the airline companies now that they’re going to have to start putting these leases on the balance sheet?
LS: If you have relatively long-term leases, then you will have potentially significant amounts.
BK: Don’t all airlines have long-term leases?
CPA: Is it possible that the leasing standards might be deferred for certain industries, say if the airline industry had a lot of problems adjusting to certain standards or the commercial property industry had problems adjusting? Would it be rolled out differently by industry?LS: We’re very interested in hearing from all constituents about what they think of the proposal, how operational it is, whether they think it’s producing information that’s useful for their investors, etc.
BK: Gulp. I really wish she had answered this; “No”. Asking the “constituents" whether “investors” are going to get “useful” information is like asking a bank robber for financial advice. Opening the door for special groups (AKA GE) to get a hall pass on this would make it a joke.