Even if the Securities & Exchange Commission doesn’t decide to replace US GAAP, the Generally Accepted Accounting Principles, with the International Financial Reporting Standards, the American and European organizations that set the rules are working toward more uniformity.
And one of the biggest changes that the Financial Accounting Standards Board is considering for US GAAP has to do with the way companies account for leases.
"It’s still a couple of years down the road, but it’s going to be a big one. It’s probably going to be one of the biggest accounting changes in a long time," Drew Speed, BKD LLP’s director of accounting and auditing for Arkansas, said last week.
Current rules allow many leases, those called operating leases, to be treated as simple expense items. "You just pay the lease payments and expense them as you pay them," Speed said.
But under IFRS, the international standards, virtually all leases would be treated as capital leases, and the asset being leased would show up on the balance sheet as both an asset and a liability.
For many companies, that will be a big change. So big that loans that are structured with debt-to-equity ratios might have to be modified.
An extreme example would be an airline that currently has no airplanes on its balance sheet because they are all leased. But the lease accounting change "will affect anyone who leases equipment. And people who lease a lot of equipment, their balance sheets are going to look dramatically different."
The accounting change would not reduce cash-flow at all, which is something that affected businesses need to make sure their bankers understand.
"We’ve had some discussions with bank lending officers to make sure they know this is coming down the pike," Speed said.
(For more on potential changes in the accounting field, click here and here.)
Sign up for Daily E-news
