- Credit analyses will be hindered if the Financial Accounting Standards Board (FASB) proceeds with a proposal to give private companies and nonprofits an extra year to change how they report operational leases on their balance sheets, analysts at Moody's said.
- FASB this summer floated the idea of delaying new standards for handling leases and other accounting line items disclosed on financial reports until January 2021 instead of January 2020. Securities and Exchange Commission-regulated and other public companies were required to make the switch in January.
- FASB formalized its proposed delay Thursday, saying smaller companies and nonprofits would benefit from more time to make the changes. "Based on what we've learned from our stakeholders ... private companies, not-for-profit organizations, and some small public companies would benefit from additional time," FASB Chairman Russell Golden said.
Under the new standards, organizations are to disclose operating leases on their balance sheet, both as an asset and a liability, in the same way that capital leases are treated. Operating leases are now disclosed as expenses on the income statement and in the footnotes to the financials.
FASB and its sister organization, the International Accounting Standards Board (IASB), adopted the new standards about three years ago as a way to increase transparency so investors and regulators would have a better idea how much liability a company has beyond what is shown on its balance sheet. Without full disclosure of these obligations, companies can look healthier than they are, FASB said.
Organizations that changed the way they handle leases said the process can be time-consuming, in part because many operational leases are embedded in other types of contracts, making them hard to identify. For example, a multiyear contract with a company to install and maintain an office copier typically includes an embedded lease for the copier.
Also time-consuming is gathering contract amendments and other documents related to the lease that have not had to be organized and accounted for in the past.
Companies can have hundreds or even thousands of leases, depending on their size and kind of business.
In a comment Monday, analysts at Moody's said the proposal would hinder the credit analysis process by compromising comparability between public and private issuers. It would also delay, "for adoption laggards," the enhanced disclosures these new standards bring. "Such delays will hurt reporting transparency, affecting a swath of non-financial corporations across different sectors," analysts Kevyn Dillow and Dean Diaz said.
The proposal could also complicate some mergers, initial public offerings and carve-outs. "Carve-outs have been gaining popularity in the corporate sector," the analysts said. "These transactions occur when a part of a business is sold or spun off. ... Going forward, those involved in such transactions would have the additional burden of determining whether the appropriate version of the accounting standard had been applied."
FASB said the delay would fit in with a broader philosophy to stagger compliance dates based on types of organizations. "Under this philosophy, a major standard would first be effective for larger public companies," Golden said. "For all other entities, the board would consider requiring an effective date staggered at least two years later."
The change wouldn't preclude organizations from applying the changes before the deadline if they were prepared to do so, he said.
The Moody's analysts recommended against staggered deadlines. "Standardizing such a practice would obstruct comparability, which would harm credit analysis beyond the current proposal," they said.
FASB's proposed delay would apply to two other changes in accounting standards: on credit losses and hedging. Under the change to credit losses, the new standards take a current expected credit loss (CECL) approach, which requires organizations to estimate expected losses over the life of the loans at the time they're put on the books rather than wait until losses are incurred.