On November 11, 2015, the Financial Accounting Standards Board voted to approve a new rule that would add leases to the balance sheets of U.S. companies, a move that could swell those balance sheets by more than $2 trillion.
The new rule affects companies that pay to lease real estate, office equipment, aircraft and other items, adding the value of those leases to balance sheets as “operating obligations” rather than debt. While companies are currently required to report their lease obligations, it is usually handled in the footnotes to financial statements and not included in balance sheet tallies.
FASB Chairman Russell Golden said that the proposed rule would help investors more clearly understand the true financial health of companies that have large lease debt and “will give investors, lenders and others a more accurate picture of the financial condition of the companies to which they provide capital.”
Critics of the lease-accounting proposal — including AT&T, Delta, CVS and the U.S. Chamber of Commerce — said the proposed rule is preferable to earlier versions that would have had additional effects, and that the final rule is “much improved for the industry from where it was,” according to Ralph Petta, chief operating officer of the Equipment Leasing and Finance Association.
One fear critics had was that adding lease obligations to balance sheets would trigger violations of debt covenants, but the FASB said that the long lead time for implementation of the rule makes it likely that these covenants would mature or be updated before it becomes an issue. The FASB also noted that technically, the leases will be considered operating obligations, not debt.
The FASB staff will draft a final version of the new rule, which still needs to be ratified by the board. That final version is expected to be issued in early 2016. The rule itself will not take effect until 2019.
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