Hoogervorst predicts “uphill battle” on lease accounting

INTENSE LOBBYING could scupper plans to record leases on company balance sheets, the chairman of global standard setter the IASB has warned.

In a speech at the London School of Economics, Hans Hoogervorst (pictured) said lobbying by the leasing industry meant the IASB and US counterpart FASB are “facing an uphill battle” to bring the leverage represented by leases onto company balance sheets.

“We will need all of the help we can get, to ensure that we do not get lobbied off course. We need national accounting standard-setters, regulators such as the SEC, investors and others to stand by their beliefs and help us to bring much-needed transparency to this important area,” Hoogervorst said.

Currently, the vast majority of lease contracts are not recorded on the balance sheet, even though they usually contain a heavy element of financing.

“If this financing were in the form of a loan to purchase an asset, then it would be recorded. Call it a lease and miraculously it does not show up in your books,” Hoogervorst said.

“In my book, if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. So is the case with debt – leasing or otherwise.

“Companies tend to love off-balance sheet financing, as it masks the true extent of their leverage and many of those that make extensive use of leasing for this purpose are not happy.”

The IASB and FASB have been working together to recognise lease liabilities since 2006. In June, the two boards agreed on a two-model approach for accounting for lease expenses on the balance sheet.

Under the two-model approach, one method will require leases to be accounted for using a straight-line expense method, while the second will allow lease contracts to be accounted for using an approach similar to that proposed in the 2010 leases exposure draft, in which lease expenses can be recognised evenly in the income statement over the course of the lease term.