Lease Accounting Change In The Works

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have decided that leases should be reported on a company's balance sheet. The proposed new standard would require a company to report the present value of lease payments on the balance sheet as a long-term liability. Opponents argue that the change would increase debt-equity ratios and companies will scale back operations to reduce debt-equity ratios back to current levels. Another argument against the new rules is that the increased debt-equity ratio would mean that some companies will exceed the debt-equity ratio written into bond and loan covenants. From a financial perspective, the rule changes will have little or no impact as equity analysts have long treated lease payments as a form of debt. Of course, the change will also result in improved performance for these companies, at least to the untrained eye. Because the rule changes increase debt to balance the balance sheet, there will be a resulting drop in the book value of equity, thus increasing ROE.