Ira Kantor, Director, Tax & Business Services, Article "The End of Off Balance Sheet Lease Accounting May Impact Access to Financing for Lessees", Featured in New York Real Estate Journal Network
New York Real Estate Journal Network
By Ira Kantor, Assurance Services Director
Leasing is a major activity for many entities. It is a means for gaining access to assets, obtaining financing and reducing an entity’s exposure to the risk of asset ownership. However, a proposed change in the guidance for lease accounting will profoundly change the financial scenario for lessees by ending the customary practice of treating leases as off balance sheet liabilities.
Recognizing leases on their balance sheets will almost certainly create a negative impact on their financial ratios, with the effect of restricting lessees’ ability to obtain financing. But on the flip side, it will give users of financial statements a complete understanding of an entity’s leasing activities.
Current accounting standards require lessees and lessors to classify their leases as either operating or capital leases based on certain criteria, with different accounting treatments applied. Despite the detailed rules that currently govern lease accounting, financial statement users have often complained that the existing guidance does not provide a clear representation of leasing activity since it often does not require the lessees to recognize assets and liabilities as a result of their leasing activities.