According to an article in Accountancy Age, new lease accounting standards could result in a world of hurt for the balance sheets of airlines.
Old lease accounting rules allowed companies to keep lease liabilities off their balance sheets, with the only impact of the leases being on companies’ income statements. New rules are intended to bring leases on to balance sheets. The airline industry are major lessees of aircraft to the tune of billions of potential liabilities.
Southwest Airlines, for example at December 31, 2008 operated 92 leased aircraft, of which 82 were operating leases, or approximately 15 percent of their fleet. Those operating leases are likely to end up being affected by the new rules, adding additional assets and liabilities to balance sheets. Southwest’s leased aircraft are generally older models. Delta Airlines has about 25 percent of its fleet under operating leases, with total payments of over $12 billion remaining on the leases.
Debt rating agencies, institutional investors and some analysts already adjust operating leases on to balance sheets of the companies that they are valuing. However those adjustments don’t show up on published financial statements. The new liabilities may come as a shock to some investors. Some companies may appear to have weak balance sheets.
The lease industry offers companies the choice of operating or capital lease treatment with the terms and payments on the leases often being only minimally different under the two alternatives.
Accountancy Age reports that in May, the Finance & Leasing Association met with other groups in London to discuss the issue, criticizing the new proposal as ‘an excessively burdensome approach for accounting for leases’.
The leasing industry has expressed its views to the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). They are concerned that the proposed new standards represent an excessive burdensome on companies and that the new rules may prevent companies from financing assets.
At a recent conference, a representative of the leasing industry said that the proposed changes could have wide-reaching consequences for companies, affecting balance sheets and income statements, but even more of a concern is complexity of the new accounting rules, with small and medium-sized businesses being particularly hard hit.
The IASB is seeking feedback on the proposals with the deadline for comments being July 17 . A final standard is expected by 2011.