WHEN you lease something—a boat, a warehouse, a machine for making ball-bearings—you agree to pay for it bit by bit over time. So it is like incurring a debt, say the International Accounting Standards Board (IASB) and America’s Financial Accounting Standards Board (FASB). Therefore, it should be on your balance-sheet. This new rule, proposed on August 17th by the two regulators, has shocked companies everywhere. It is up for public comment until December, but could be enacted as soon as June next year.
Today, companies can opt either for a “capital lease”, which goes on the balance-sheet, or an “operating lease”, which does not. This distinction makes a certain sense. But the IASB and FASB think it is open to abuse. By labelling leases as “operating”, firms can appear less indebted than they really are. The new rules would put the right to use the leased item in the assets column. The obligation to pay for it would go in the debit column.
That will make a lot of firms look wobblier: a survey by PricewaterhouseCoopers, an accounting firm, found that it would add about 58% to the average company’s interest-bearing debt. Not only new leases but also existing ones would immediately be subject to the new rules. On the other hand, since rents will no longer be a running expense, operating earnings could see a bump upwards. But since the downturn, many companies are close to their maximum debt limits, and the new rules could push them over the edge. Small wonder they are howling.