New Accounting Rules Could Eliminate Operating Leases

BOSTON—A discussion paper on potential changes to lease accounting was released last month by the US Financial Accounting Standards Board and the International Accounting Standards Board. Comments on the proposed rules are being accepted until July 17, an exposure draft is anticipated in 2010 and final rule issuance could come as early as 2011. But as currently envisioned, one industry expert estimates the changes could see at least $1.3 trillion of real estate and equipment operating leases suddenly capitalized on the balance sheets of public companies in the US.

“The fundamental thing that’s going to occur, if it goes through, is that all leases will be capitalized,” says Mindy Berman, Boston-based managing director in the corporate capital markets group of Jones Lang LaSalle. “There will be no more off-balance-sheet treatment. Operating leases will go away.”

Likewise, the pattern of rent expense will change, since the straight line rent expense reporting of operating leases will no longer apply. Lessees will have to include any lease renewals, contingent rents, purchase options and residual guarantees when estimating the liability of a lease.