Will new lease accounting lead to less leasing?

Accounting experts are beginning to discuss whether companies might change their leasing strategy when new accounting standards take effect requiring leases to be reflected on corporate balance sheets.

An association of accountants in Australia is pondering whether companies will look to structure lease arrangements to take advantage of exceptions from balance sheet recognition under International Financial Reporting Standards. Short-term leases and low-value leases are both excluded from the scope of the new lease accounting standard under IFRS, wrote Alex Malley, chief executive of CPA Australia.

“It is suggested that companies may seek to structure their lease arrangements to take advantage of these exemptions,” wrote Malley. He’s not advocating that approach, and he also cautioned the standard has “a number of in-built mechanisms” that are meant to make it difficult to work around them so as to avoid balance-sheet recognition for agreements that are, in substance, leases.

A sharp drop in equipment leasing activity in the United States from July to August has nothing to do with the pending lease accounting standard for companies that report under U.S. GAAP. That’s the view of Ralph Petta, president and CEO of the Equipment Leasing and Finance Association.

ELFA data says new business volume for the as measured by the association’s lease and finance index fell 17 percent in July from the same month a year earlier. Volume dropped 30 percent from the month before, and 8 percent in year-to-date tallies, the ELFA reports.

Petta calls it a “rollercoaster ride” that has characterized the equipment finance sector in 2016. Positive economic indicators, like a recent strong jobs report, lower unemployment, and a bullish equities market, are being offset by sluggish overall growth in the U.S. economy and stagnant capital expenditure spending by both large and small companies.

The Financial Accounting Standards Board is requiring all companies to bring virtually all leased assets and related liabilities on to corporate balance sheets beginning in 2019. The key exception is for leases that are less than 12 months in duration. While FASB and the International Accounting Standards Board issued requirements that are aligned in some areas, they differ in terms of how companies will reflect the effect of leasing in their income statements.

Petta says he expects little, if any, impact on the amount of equipment lease and finance volume as a result of the new accounting. Ultimately, FASB elected to keep the current two-lease classification model similar to today’s operating and capital leases, preserving the “critical components” of current lease accounting, he says. “The many benefits of utilizing lease financing as an equipment acquisition tool—flexibility, preservation of capital, efficient tax and risk management—all remain with adoption of the new rules in two years.”

Accounting firms are rolling out plenty of new materials to help companies prepare to adopt the new standard, including a comprehensive new guide from PwC.