A recent op-ed in the Wall Street Journal written by congressmen Brad Sherman (D-CA) and Peter King (R-NY) expresses serious concern that the potential costs of proposed revisions to the accounting standards for leases significantly outweigh the potential benefits. In fact, Sherman has long been an opponent of the lease project and has provided several comment letters to the Financial Accounting Standards Board (FASB) regarding this topic. Sherman is a CPA and co-founded the Congressional CPA Caucus, and both Sherman and King are members of the House Financial Services Committee.
Sherman and King believe that adoption of the proposed standard, which would require companies to record the value of the leased asset and the lease obligation on the balance sheet, could have a devastating impact on the economy. The addition of debt to the balance sheet could impact companies’ borrowing capabilities, debt covenants, and interest rates and alter decision-making according to the congressmen. The congressmen reference a 2012 study performed by Chang and Adams Consulting, which estimated that the economic impact of the proposed standard could cost anywhere from 190,000 U.S. lost jobs and $27.5 billion in U.S. GDP to 3.3 million U.S. lost jobs and $400 billion in U.S. GDP. Those amounts were the cumulative impact of three potential detriments of the proposed standard identified by the study: 1) reduced spending by companies to counteract the increase in leveraging, 2) increased borrowing costs brought about by higher debt ratios, and 3) reduced real estate values. The study also noted that the proposed standards could lead to shorter lease terms, higher lease payments, and a significant increase in compliance costs.
The FASB’s objective for the proposed standard is to increase the transparency and comparability of companies’ financial statements. The FASB believes that the users of financial statements are provided with a more faithful representation of the financial statements when leased assets and lease obligations are included on the balance sheet. At this time, the FASB is currently deliberating on the comments received on its May 16, 2013 exposure draft.
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