Outcry expected over new lease accounting rules

Outcry expected over new lease accounting rules

The Accounting Standards Board has unveiled its highly contentious leasing discussion paper today. It will prompt a massive outcry from companies which rent assets, writes Lucinda Kemeny.

The paper, which seeks to end the distinction between operating leases and financial leases, will add billions of pounds to the balance sheets of companies which have previously been able to keep operating leases off balance sheet.

ASB chairman Sir David Tweedie said: ‘What we are doing is saying that if you have an obligation to pay then it goes on the balance sheet. The effect is going to be very big as most operating leases will come on for at least part of their lives.’

Tweedie explained the companies had been able to abuse the arbitrary distinction between the two types of leases and keep large figures off the balance sheet – a sum of around £18bn for the car fleet industry alone.

But Alan Jones, accountant and managing director of logistics group TNT, berated the ASB and pointed out that putting operating leases on the balance sheet would not only increase liabilities but correspondingly, inflate assets as well, giving a misleading picture of the company’s position.

Others have also criticised the move as potentially damaging to capitalisation ratios such as return on capital employed, which are important indicators for analysts.

But the ASB, as part of an international crackdown on leasing under G4+1, is determined to push for change and believes that analysts take off-balance-sheet leases into consideration already when making their calculations.

Responses are requested by 7 April 2000.

Today’s launch coincides with the introduction of revised FRS16 on current tax.

ASB to make radical changes to current accounting policies

The ASB website is at /www.asb.org.uk

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