New Accounting Standard Moves Closer to Conclusion

The Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) are jointly working on a replacement for the current lease accounting standards, FAS 13 and IAS 17, that will be followed by all companies worldwide. The impetus to this new standard was the Enron accounting scandal of 2001. Enron's demise was not caused by leases, but it was caused by other off-balance-sheet transactions. These transactions proved to be accounted for incorrectly, and readers of Enron's financials were not totally aware of the implications. The crisis prompted the U.S. Congress to enact the Sarbanes Oxley Act, which, among other things, directed the SEC to identify other off-balance-sheet transactions. Leases, specifically operating leases, were cited as a major class of off-balance-sheet obligations. In the opinion of the SEC, readers of financial statements would have better information if operating leases were capitalized as an asset and a liability on balance sheet. As a result, the FASB/IASB put a lease accounting project on their agenda in 2006 with the objective of creating a new lease accounting standard requiring lessees to capitalize an asset and liability for all operating leases. Unfortunately, the project has gone much further than merely capitalizing lessee operating lease obligations. The project also includes major changes to lessor accounting, which no one thought was a problem.