Lease accounting changes highlighted

November 01, 2011 | 17:01
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A Grant Thornton international business report showed that 54 per cent of businesses globally are not aware of global accounting changes.

The survey of 2,800 businesses globally also found that of those who were aware of the changes, 33 per cent thought the changes would increase costs and complexity, but only 15 per cent thought it would increase transparency.

Twelve per cent of businesses indicated they would alter the way they structure leases in the future.

Results from the global business survey warned that while changes were long overdue, if not done properly, transparency could actually be worse than before.

According to the survey, Latin America and ASEAN are the two regions having the highest ratio of 73.7 and 67.5 per cent respectively approving the proposed changes in lease accounting.

Although having not approved the changes, Vietnam had the highest rate of 53.8 per cent agreeing that the suggested changes will make the financial cost higher and operations more complicated.

However, 38.5 per cent of enterprises recognised that the recommended changes in lease accounting would help improve the transparency in financial reporting and could be quite positive for the economy in general.

The survey revealed that awareness of the change was greatest in the US (69 per cent), Mexico (68 per cent) and Chile (63 per cent), and lowest in mainland China (5 per cent), Denmark (8 per cent) and Turkey (14 per cent).

Amongst those aware of the changes, support was strongest in Latin America (74 per cent) and ASEAN (68 per cent), and weakest in North America (32 per cent). Businesses in the BRIC economies (59 per cent) were much more supportive than their counterparts in the G7 (36 per cent).

With the International Accounting Standards Board (IASB) and Financial Accounting Standard Board (FASB) set to re-expose their latest proposals early next year, Grant Thornton stressed the need for businesses to assess the impact of the potential changes and for investors to consider whether the new model would deliver the transparency they were rightly calling for.

“There is no question that a global review of lease accounting is long overdue,” said Grant Thornton International CEO Edward Nusbaum. “The lack of transparency with regard to leases has festered for years, but a major change to lease accounting is a once-in-a-generation event and the IASB and FASB need to be patient to get things right.”

“Some of the proposals we’ve seen could create a different set of incentives to structure leases to achieve the desired accounting outcomes.”

He noted that change for the sake of change was not the goal and a rush to a new standard could actually make things worse, adding that “investors need transparent, comprehensible information both on leasing obligations and also on the related revenue and costs.”

Although there are legitimate tax and legal advantages to lease financing, too many transactions have been structured for the purpose of arriving at a desired accounting treatment. The current balance sheet does not present a complete and transparent financial picture.

Basic analytical tools like return on investment and debt-to-equity ratios are useless when neither the investment nor the debt is on the books.

Before conducting even elementary financial statement reviews, users must look to the notes, and then make their own adjustments to published accounts based on what is, in many ways, incomplete information.

By Hieu Dinh

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