The Capitalization of Leasing or How Accountants Generate Fees in a Bad Economy

Posted on January 31, 2011


What is better than 20 lawyers at the bottom of the ocean . . . 21 accountants!

In what can only be described as a blatant attempt to create something out of nothing at all, instead of love like Air Supply the International Financial Reporting Standards “IFRS” is looking to create money by changing the rules regarding the recording of leases on company books.

In the Coles notes version leases, whether for rental space, office equipment or fleets, used to be recorded as a noted expense in a manner that is commonly referred to as a “straight line” 12 month period.  With the proposed changes, leases will now be recorded as a liability on the balance sheet and . . . wait for it . . . for the entire lease period including renewals.

In short, if a company has a 5 year lease with an option to renew for say another 5 years, then the entire payments over a 10 year period (the primary lease and renewal periods combined) have to be recorded as a liability.  Just in case this wasn’t an interesting enough turn of events or fee creation initiative – take your pick, organizations will not be allowed to grandfather their present leasing arrangements, meaning that almost everyone will have to restate their financials relating to their balance sheet.  Now you know why I had made the reference to creating fees out of nothing at all!

Now we will be calling on one our resident experts from the BC Compliance Group to join us on air to talk about this development and its implications in greater detail over the next week to 10 days.  However, the fallout from this in areas such as Governments selling their buildings and leasing the space back to fleet management and let’s not forget EBITDA restatement relative to bank financing and credit lines and you have wonder . . .

The premise for making this alteration to existing standards is purportedly linked to the desire to create an accurate liability picture . . . something that must have escaped the bean counters in the case of an Enron.

I never thought that I would say this, but if it came down to my sons being accountants or lawyers, and they asked me for my advice . . . I would have to go with the law profession.  At least we know what we are (or are not) getting with this group.

A Special Note of thanks to Michael VanderGoot, CPA from the BC COMPLIANCE GROUP, LLC Expense Recovery & Reduction Services for contacting Procurement Insights and providing us with the exposure draft regarding the proposed IFRS changes.  Please note that the opinions expressed in this blog are mine and mine alone and do not represent the opinions of BC Compliance Group.  Michael will of course be joining us as a guest on the PI Window on Business in early February to discuss in greater detail the impact of leasing capitalization.