Big Hit from Lease Changes

Moving leases onto balance sheet would boost companies’ debt by 11%: study.

Proposed changes in the way companies account for leases would boost the debt on U.S. companies’ balance sheets by 11%, which could increase the volatility of their earnings and make it harder for them to get financing, according to a study released today by the Equipment Leasing & Finance Foundation.

The Financial Accounting Standards Board and the International Accounting Standards Board have proposed altering accounting rules to require companies to put most leases on their balance sheets. Currently companies report operating leases in the footnotes of their financial statements.

The study was conducted by IHS, which examined 1,800 companies’ 2010 financial filings to determine the amount of leases, then scaled that information up.

Mark Lauritano, a managing director at IHS, said the analysis shows U.S. companies would add $2 trillion to their balance sheets, boosting their total debt by 11% and increasing their debt-to-equity ratios.

“Higher debt-to-equity ratios can increase volatility in corporate earnings and companies’ ability to secure financing, among many other consequences,” he said on a conference call today. “U.S. companies as a result would experience about a 2.4% reduction in net income the first year of the new accounting rule.”

Companies that have a lot of leases are likely to see their borrowing costs rise, Lauritano said. And IHS did simulations that suggest every 50-basis-point increase in companies’ cost of capital would result in a $10 billion reduction in U.S. GDP and mean 60,000 fewer U.S. jobs by 2016.

The study suggests the accounting changes would result in a permanent decrease of $96 billion in the net worth of U.S. companies, Lauritano said.

The Equipment Leasing and Finance Association “urges standard-setters to reconsider their proposal to minimize the negative effect it will have on businesses,” said David Merrill, a past chair of the association and president of Fifth Third Leasing Co.

The study is available here.

 

 

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