It's going to be BIG

What will the impact be of capitalizing operating leases, with option periods included? For many retail chains, the tally is literally going to be in the billions of dollars. We've done an analysis for one chain whose liability for capitalized leases will be larger than their entire present current and long-term liabilities (and several times their shareholder equity). The effect of putting an equal amount of assets and liabilities of that magnitude on the balance sheet will be a substantial increase in reported leverage and decrease in important financial ratios. This has important implications for loan covenants and other financial requirements.

It should also be noted that previously reported estimates of the impact of the new standard (such as Georgia Tech's study last year) are likely substantially understated, because they were based on the reported future rent commitments of companies. But those reported commitments exclude most renewal options, which now will have to be included in whole or in part. Many retail store leases have an initial term of 20 years, but then renewal options for as many as 40 more years. Under the new "expected payments" requirement, future rents reported may be double or more what is currently reported, with a commensurate increase in assets & liabilities.

Our EZ13 Lease Accounting software permits you to enter your operating leases for current reporting, but capitalize their remaining rents at a cutover date you specify for pro-forma reports in keeping with the exposure draft of the new lease accounting standard.

FASB Chairman Herz resigns

The chairman of the FASB, Robert Herz, unexpectedly resigned yesterday, effective October 1. There is concern that his departure, and the simultaneous announcement of the Financial Accounting Foundation, the FASB's parent, that the FASB will be increased from 5 to 7 members (undoing a change in 2008), will delay the projects currently underway, including the lease accounting rewrite. The boards have been pushing hard to complete a large number of convergence projects by the end of June 2011, which incidentally is the end of service for the IASB's chairman, Sir David Tweedie. But will FASB want to make all these major decisions with an incomplete board?

Lease Accounting Exposure Draft released

The FASB and IASB have released the Exposure Draft of the proposed new lease accounting standard (FASB topic 840 in the new Accounting Standards Codification). The FASB has made the ED available here. The IASB has posted the ED, an accompanying Basis for Conclusions (which the FASB has bundled with the ED), a Snapshot Summary, and a Press Release.

The comment deadline is December 15, 2010. The FASB invites people to send comments by email to director@fasb.org, File Reference No. 1850-100. The IASB asks for submissions on their web page. As with the Preliminary Views document last year, the comment letters sent to both boards will be combined for the boards' review (and it is not necessary to send a comment letter both places).

I will post a review of the ED here in coming days, though there shouldn't be any real surprises; this is just a restatement of the decisions made over the last year, which have been reviewed as they happened in earlier posts on this blog. As with the Preliminary Views document, I expect to review the ED section by section.

Exposure Draft imminent; live webcast discussion August 18

The IASB has scheduled a live webcast on August 18 to present the Exposure Draft of the new lease accounting standard. The webcast will include a Q&A time. They're holding the same event twice, to have it at times that are reasonable in more time zones: 10:30 am & 3:30 pm London time, which is 5:30 am & 10:30 am Eastern Daylight Time in the U.S. You may register for either at the IASB web site. I presume the Exposure Draft itself will be out before the webcast, but I see no sign that it has yet been released.