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September 25, 2023

It’ll Be Nothing Short of a Miracle for Meaningful Lease Accounting Reform to Become Reality

Since FASB Statement No. 13 was issued in the mid-70s, businesses have managed to develop a lot of creative ways for classifying some of their future obligations as operating leases, thus keeping those debts off their balance sheets. That's handy for all kinds of reasons, but some people think that it's a very bad thing. Solution? Reform of course! 

"Significant reform for lease accounting is crucial for the credibility of all financial reporting and for those who regulate it, use it, audit it and implement it," said Paul Miller, a University of Colorado accounting professor. Without recognizing leases, he said, "the balance sheet is not complete, and if it's not complete, then it's not useful."

In the nearly forty years since lease accounting got a touch-up, the internal revenue code has been reformed. That makes things a little stale. And I suppose it'd be nice if financial reporting reflected a tiny bit of reality and were useful. 

Our friends at the FASB can safely be counted in the quality financial reporting camp and they've been trying to improve lease accounting for a while. Plus, it serves as an opportunity to play nice with the IASB, and prove that accounting rule convergence is more than just a bedtime story accounting nerds read to their kids. 

But as is typical in any world that involves making rules for businesses to follow, reality and common sense often takes a back seat to inconvenience. And HOLY MOSES is reforming lease accounting inconvienent. So inconvient, in fact, that despite leases passing the liability duck test with flying colors, opponents of the Boards' current reform proposal, like the U.S. Chamber of Commerce, would like everyone to take a step back and really think about what we're doing here:

"There should be a cost-benefit analysis that attaches here if we're going to go through this," said Tom Quaadman, a vice president at the U.S. Chamber of Commerce, a Washington, D.C.-based business lobbying group opposed to the new standard.

Unfortunately for the accounting purists out there, it's far easier to argue that changing lease accounting rules will cost businesses eleventeen quadzillion dollars in lost capital and earnings, not to mention the "unnecessary burden on job creators" that this would cause. Arguing in favor of more "credibility" and "usefulness" and "comparability" is a hard sell because it's pretty difficult to quantify those things.

And even if the FASB that a leases are a financial obligation that will have to be satisfied at some point in the future and it does belong on the balance sheet, try explaining that to the members of Congress who pull sternly worded letters out of their holsters at the drop of Tom Quaadman's hat. And don't think they won't threaten the FASB with its very existence. Because they will.

Other than that, this should be a breeze.

Lease accounting fight tests resolve of global standard setters [Reuters]

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