Mike Sweeney

The US equipment lessor EverBank Commercial Finance is among many in the industry expressing some concern about how lessees will cope with the coming changes in lease accounting. The US healthcare sector, where EverBank Commercial Finance plays a leading role, is seen as one area where leasing customers will find the new rules challenging.

Mike Sweeney, general manager for the healthcare platform at EverBank Commercial Finance, said: “When contracts presently classified as operating leases have to be brought on to the lessee's balance sheet, many obligors may be placed in technical breach of loan covenants on bank credit facilities. For bankers often impose restrictions on borrowers' leverage or debt/ equity ratios.

Before the new lease accounting standard is re-exposed for comment early next year, the standard setters will be further considering the rental expense profile for the lessee. This became clear at a meeting of the joint standard setting bodies – the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) - on December 14.

The principle of capitalizing all leases under the new standard is not in question.

However, as became clear with the recent concerns raised by the US Equipment Leasing and Finance Foundation (ELFF), the front- loading of expense towards the early part of the lease period, compared with the present straight line expense profile for operating leases, is widely seen as problematic (see AFI report, December 7).

Bill Bosco

A report released today (Wednesday) by the US Equipment Leasing & Finance Foundation (ELFF) shows that the proposed new global lease accounting rules could have a heavy adverse impact on lessees. The research report was conducted by economic and financial analysts IHS Global Insight.

While it focuses on the impact on US lessees, many of the findings in the ELFF report seem equally relevant to those in Europe and other jurisdictions which are subject to international financial reporting standards (IFRS).  The accounting changes, which will become fully effective possibly from January 2016, will be closely convergent as between IFRS and US generally accepted accounting practice (GAAP).

It now seems likely that the promised re-exposure draft (RED) of the new global lease accounting standard will not be issued until next March. Some further clues to the timetable came this month with the release of a RED for a separate new standard planned to take final effect at the same time as the leasing rules.

That separate standard deals with the general subject of revenue recognition (Rev Rec). For that one the RED does not specify a final effective date, but promises that it will not be before 2015. The same is likely to be said in the leasing RED. Respondents will of course have an opportunity to comment on the timing.

Following last month's meetings of the global standard setters on lease accounting (see AFI report, October 23), a majority of members of the US Financial Accounting Standards Board (FASB) have indicated that they wish to reconsider key aspects of lessee accounting rules agreed earlier this year.

The commitment to bring all leases on-balance-sheet is not in question. However, the concerns apparently relate to the pattern of expense recognition in the profit and loss (P&L) account through the lease period, where the joint standard setters International Accounting Standards Board (IASB) and FASB) have already made a series of reversals in the original proposals. FASB's new concerns are mainly focused on real estate lessees, but could have possible implications for equipment leasing as well.