A Norwalk-based accounting board has once more pushed back a new accounting treatment for commercial real estate and capital leases, with small businesses worried that the rules could place a significant burden on keeping the books.
Over several months last year as it huddled with the International Accounting Standards Board, the Norwalk-based Financial Accounting Standards Board drew nearly 800 letters of comment including from major area corporations like General Electric Co., IBM Corp., Xerox Corp. and United Technology Corp.
As of now, lease contracts are categorized as operating leases or capital leases, with companies allowed to list operating leases as an operating expense and so keep it out of a balance sheet ledger of assets and liabilities. Under a capital lease, a tenant shares in the property”™s ownership, allowing a company to list the lease as both an asset and a liability on the balance sheet.
Under the new rules the FASB has contemplated since 2006, companies would be forced to recognize the future liabilities on payments for operating leases, with a potentially major impact on their balance sheets.
In April, the FASB and the IASB said they would not meet a previous June 30 goal of completing new lease accounting rules. They now plan to “re-expose,” in their words, a draft proposal to public comment, effectively pushing back any implementation date for the new rules.
“During our discussions of the extensive comments we received on the exposure draft, the boards have reaffirmed the major change to lease accounting, which is to report lease obligations and the related right-to-use on the balance sheet,” said Leslie Seidman, FASB chairman, in a prepared statement issued this month. “However, the boards decided to make many other changes to address the comments made by stakeholders. The boards decided that, while we still have other matters to discuss, stakeholders would appreciate the opportunity to comment on the revised package of conclusions.”
Small-business groups had already aired their thoughts in the first round of comment letters, including the advocacy office of the U.S. Small Business Administration, which asked for an exemption on any lease transaction valued at less than $250,000.
The SBA cited the threshold as one used by the Equipment Leasing and Finance Association to earmark “small ticket” leases essentially not worth the trouble of additional paperwork.
As an example, the SBA cites the case of a small business leasing a $1,000 photocopier, saying the company would be forced to report the copier on its asset sheet as if it owned the machine.
The SBA added the rule could have unintended effects on other cogs in the finance machine, including community banks that might be required to increase their capital reserves as assets at their lending clients were reduced in response to the new lease rules.
The FASB did not include the SBA”™s threshold in a draft proposal issued last year.
The changes will also affect accounting software vendors like Wilton-based Financial Computer Systems Inc. and Link Systems, a company with offices in Stamford and New York City whose ProLease software it co-developed with ProCalc is used by corporations and commercial real estate brokers like CB Richard Ellis, Colliers International and Cushman & Wakefield.
In addition to soliciting additional comments from industry, among the more significant changes to emerge from the July meeting was the simple decision to account for short-term leases as the operating variety, according to Kelvin Smith, vice president of Financial Computer Systems, who is tracking the lease debate on a blog.
“This will protect against needing to do convoluted accounting for things like rental cars and hotel rooms,” Smith stated.
