FT.com / Lex – Lease accounting
Investors brace for dramatic accounting change. That sounds like a fantasy headline from one of the great geeky professions, but it’s almost true. New rules announced on Tuesday on lease accounting will increase the average company’s debt load by 58 per cent, according to PwC and Erasmus University.
The issue: with the right kind of lease contract, companies currently keep assets off the balance sheet that are both durable and vital to operations – for example airlines’ aircraft and retailers’ stores. But accountants are on the way to banning these operating leases. Almost all leases will be considered financial, so both the assets and the corresponding discounted present value of future payments will be on the balance sheet. The result: the average retailer can expect a three-fold increase in debt levels. For Tesco, an extra £15bn of lease liabilities will be included into a pool barely £200m deep.