When accounting goes unaccounted for
Ed. note: Sad to report that today is Adrienne's last day at Going Concern. She's been a huge part of the GC community since the beginning and she will be sorely missed.
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I see that FASB is sticking to its schedule for ending most off-balance-sheet treatment for leases, and so is the IASB. It’s about time, frankly, if only to spare us poor, I mean, intrepid financial journalists from having to sort through the particulars of the current accounting treatment a moment longer than necessary.
I speak from personal experience here, having wrestled with the false distinction between capital and operating leases for a sidebar to a piece I wrote for CFO Magazine way back when. The article delved into the details of a particularly complex variation that companies were using to finance real estate, called synthetic leases.
I swear, that sidebar itself shaved a year off my life, and at my age, every one counts, and did even a decade or so ago.
In fact, the hoops that companies must jump though to get a deal to qualify as an operating lease still make my head spin. Consider: In order to qualify, the current rule, known as FAS 13, requires that the lease fail all of four tests aimed at distinguishing the financing from being the equivalent of ownership.
The thing that puzzled me about all this is that many, if not most, CFOs claimed that accounting treatment wasn’t the reason, or at least not the main one, that they used such financing techniques in the first place.
But the reason they gave often came down to their advantageous cost, and like all off-balance-sheet financing techniques, I could never quite understand how that lower cost arose without the accounting treatment.
After all, it seemed to me the only reason operating leases were less expensive than capital leases was that the underlying asset wasn’t counted as the property of the company by a sufficient number of investors willing to therefore pay a premium for the company’s equity. And if they did that, they were ignoring the fact that the asset was indeed the property of the company on anything other than a narrow, legal basis, and that the arrangement wasn’t financing its purchase.
So tell me again how off-balance-sheet financing results in lower cost if it doesn’t really do that.