Tesco and Sainsbury's attack lease accounting proposals

SUPERMARKET giants Sainsbury and Tesco have described new lease accounting proposals as “unintuitive” and “inconsistent”.

The two retail chains have both attacked the new proposals, which would force listed companies to recognise lease contracts as liabilities or assets in their published statements.

The rules, proposed by the International Accounting Standards Board (IASB), will particularly affect retailers, which hold major lease commitments tied to their supermarket properties.

The IASB is worried that current rules allow companies to pick and choose whether leases are held on or off balance sheets by manipulating a technical distinction between finance and operating leases.

The new standard aims to place these leases on balance sheets in the form of an asset or liability, to provide investors with a better overall picture of a company’s financial position.

Tesco, which operates 4,811 stores worldwide, said the proposals would only confuse investors. The company’s minimum lease payments under current accounting rules totaled £14.7bn with a rental expense of £927m in the last year.

“We believe that the proposals fail to properly reflect the substance of leasing transactions, introduce accounting inconsistencies and significant financial statement distortions, thereby failing to meet the needs of users,” Paul Fearn, group director of finance and control, said in a submission letter.

Sainsbury’s, which operates 850 stores, has also voiced opposition to the proposals. The supermarket chain’s annual operating lease rental expense is around £440m of which almost 90% relates to land and buildings.

John Rogers, chief financial officer with the retailer, described the measures as “unintuitive”.

“We believe that the implementation of the exposure draft will only replace one imperfect model, which is widely understood, with another imperfect model,” he said.

US estimates put the value of global leased assets at £765.8bn. The current operating lease commitments of the top 50 FTSE 100 companies alone comes to about £94bn, according to a high level study by a major accounting firm.