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A proposal by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) to change how leases are accounted for on corporate balance sheets could have a widespread, detrimental impact on the U.S. economy, according to a new study cited by the Equipment Leasing and Finance Association (ELFA). The accounting changes could trigger a $10 billion reduction in Gross Domestic Product and mean 60,000 fewer jobs by 2016, the study found.

Titled “Economic Impacts of the Proposed Changes to Lease Accounting Standards," the study was conducted by IHS for the Equipment Leasing and Finance Foundation “to substantiate how the complex proposal might affect an already fragile U.S. economy,” ELFA officials said in a prepared statement.
 
Currently, operating leases are reported in the footnotes of companies’ financial statements instead of being reported on balance sheets. The proposed lease accounting changes would require companies to record virtually all leases on their balance sheets, depressing company profits, economic growth and financial stability, ELFA officials said.

If the changes are implemented, U.S. companies would add an estimated $2 trillion to their balance sheets — increasing total debt by 11 percent — and experience a 2.4 percent reduction in pre-tax net income in the first year, the study found. In addition, the cost of debt could rise through higher interest rates and there could be a permanent reduction of $96 billion in of U.S. companies’ equity, ELFA officials said.

The FASB and IASB plan to issue a new draft of their proposal by early April, which would be followed by a 120-day comment period. The ELFA proposes that the boards include four considerations in their revised lease accounting rules: recognize that there are at least two types of leases, capital and operating; offer relief from the complexity and compliance burden of the proposal in such areas as transition, adjustment of estimates in the lease term, and accounting for variable rents and disclosures; preserve the netting in leveraged lease accounting that allows lease providers to reduce the cost to lease; and preserve sales-type lease gross profit recognition that allows captive companies to charge lower rates.

“Leases account for hundreds of billions of dollars in transactions annually, contributing not only to businesses’ success, but also to U.S. economic growth, manufacturing and jobs,” said ELFA President and Chief Executive Officer William Sutton. “It is our hope that the boards will seriously consider the negative consequences of some of these proposals and ultimately arrive at alternative approaches that do not harm American businesses and the U.S. economy.”