Expert warns accounting standard change means all leases will need to be put on the balance sheet

An upcoming change to international accounting standards that would force companies to put all operating and financial leases on their balance sheet could set firms on a collision course with their nervous bankers, an expert has warned.

And while the change is aimed at listed companies around the world, Australia’s refusal to adopt international accounting standards for SMEs could mean that smaller firms are also forced to adopt the change.

Keith Reilly, head of professional services at Grant Thornton Australia says the International Accounting Standards Board says the way leases are accounted for has long been a sticking point in the accounting profession.

While financial leases are required to be put on a company’s balance sheet (both as an asset and a liability), operating leases have been typically left off the balance sheet, with the lease simply recorded in a note to the accountants.

This basically allowed companies to keep their debt ratios (total debt to total assets) lower.

“Everyone has known this has been a bit of a rort in accounting,” Reilly says.

However, he says the new accounting standard argues that “any leased item that adds value to the company should go on the balance sheet” and that lease payments for a set period are no different to any other liability.

Reilly supports the introduction of the accounting standard, but says companies need to start thinking now about how the change may affect them, particularly if it leads to an increase in debt ratios or a decrease in earnings per assets.

While the final accounting standard is unlikely to be set until June 2012, and would not come into affect for another 12 months after that, Reilly argues businesses that use leases need to be thinking about the issue now.

“What I am trying to do is alert our clients that this proposed change in accounting has now effectively arrived,” he says.

“If you have used leasing in the past, you need to recognise that those things will now be going on your balance sheet.”

Companies will particularly need to consider how the changes may affect their funding arrangements.

“If your relationship with your bank is currently a bit edgy, it probably doesn’t help.”

Because the Australian Accounting Standards Board has decided not to introduce the International Accounting Board’s new standards specifically for the SME community, Reilly says the new leasing rules will impact smaller companies too.

“It won’t dribble down, it will whack them over the ears.”

He says he will be continuing to lobby the Australian Accounting Standards Board in the hope of getting them to consider adopting the international SME standards, and will also look to lobby the International Accounting Board to ensure the new leasing standard is a simple to understand as possible.

“We’ve still got some time to convince the AASB of the stupidity of their decision [and] I think this leasing accounting standard could be the thing that forces the AASB to re-examine its decision.”