LONDON (REUTERS) - Companies from airlines to retailers in more than 100 countries will have to swell their balance sheets with trillions of dollars under a new accounting rule for leases that should shine a clearer light on debt.
Leases allow a company to use an asset in return for regular payments, and are mostly held off balance sheet, making it hard for investors to get a full picture of liabilities without delving into the depths of annual reports.
The International Accounting Standards Board (IASB) published a new rule on Wednesday (Jan 13) requiring leases of more than a year to be placed on balance sheets from January 2019.
"It's a major change and will affect around half of all companies, especially airlines, shipping and retail. They will have significantly different financial statements," IASB Chairman Hans Hoogervorst told Reuters.
Some defunct retailers have surprised investors by disclosing that off-balance sheet leases were almost 66 times the value of on-balance sheet debt, the IASB said.
IASB rules are applied across the world, including in the 28-country European Union. The United States has its own accounting regime but will complete a similar reform next month. "We are converged on the main issue of bringing leases on to balance sheets," Mr Hoogervorst said.
Listed companies using IASB and US accounting rules have leases worth US$3.3 trillion, with over 85 per cent off balance sheet. Leasing grew by US$944 billion in 2013/14, the World Leasing Yearbook said.
The new IASB rule simplifies what constitutes a lease, with those of less than a year or for low value items like personal computers, exempt to cut red tape.
Credit rating agencies already make adjustments for "hidden" leases, but the IASB said these can be wide of the mark.
Rulemakers began work on new leasing rules in 1996 but have faced strong opposition from leasing companies, who argued that change would kill a useful industry. "We know it won't be a popular standard, but leases will remain an attractive and flexible form of financing," Hoogervorst said.
Leaseurope, an industry body, said it will review the final standard to see if it will work for European businesses, but winners and losers are likely to emerge in some form.
"It's hard to determine what the investor reaction will be. It's hard to argue against the new standard, but the numbers involved are huge," said Ed Nusbaum, chief executive of accountants Grant Thornton International.
KPMG, an accounting firm, said financial companies would look at whether regulators will force them to hold more capital against bigger balance sheets.
The new rule will also kill sale-and-leasebacks as an off-balance sheet financing proposition, KPMG added.
"I think a lot of companies are not aware of the financial impact of leases and for some it might lead to different divisions between leasing, buying and borrowing assets at the margin," Hoogervorst said.
Opinion is also divided over the impact on loan covenants that companies have with banks, which are often based on a cap on balance sheets to avoid too much risk-taking.
Mr Hoogervorst's predecessor, David Tweedie, kicked off the reform two decades ago and annoyed leasing companies by saying he wanted to fly the Atlantic in a plane that was on the airline's balance sheet.
"It will change balance sheets massively," Mr Tweedie told Reuters. "You can't be paying rent for an aeroplane you have to stick in the Arizona desert and pretend it's not a liability."