A Correction to the White Paper: “The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?”

In a earlier white paper, The Lease Accounting Tsunami; Are You Prepared to Weather the Storm?, I wrote that users should evaluate the effects of the new FASB/IASB on a company’sdebt structure, debt to equity, and other factors that would be affected by the new standard, assuming lease liabilities would be considered as debt. In point of fact, the FASB explicitly decided that Type B lease liabilities should not be considered as “debt.” However, the IASB which treats all leases as Type A leases or capital leases, does consider these liabilities as “debt-like liabilities.” (Their exact words) As one of my accounting friends advised “The accounting for Type A leases requires IASB companies to record interest expense, and segregates payments on the lease liability into operations and financing outflows per the cashflow statement, which is consistent with debt.”

Thus, US companies will experience less impact from the new standard, particularly as it relates to debt covenants, debt to equity metrics, and capital structures. But US companies with significant international lease portfolios subject to the IASB standard, will see their debt levels increase.