Advocacy Recommends that FASB and IASB Develop Small Business Alternatives in New Accounting Standard on Leases

            The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a Discussion Paper (DP) entitled, “Leases: Preliminary Views.”  The DP invited public comments.  The comment period is open until July 17, 2009.

 

            The DP proposed capitalizing all leases, including “operating leases.”  The proposed capitalization of all leases would affect all small businesses that lease equipment or real estate, regardless of the monetary value or duration of the lease.  As an example of the wide-reaching scope of the proposed standard, even a small business that leased a $1,000 photocopy machine for a fixed period of two years would be required to change its financial statement and report the photocopier on its asset sheet as if the small business owned the photocopier. 

 

            Small business stakeholders that have been in contact with Advocacy have expressed concern with the proposed lease accounting standard contained in the DP.  First, small business stakeholders report that, because the DP would reclassify operating leases as capital leases, this would substantially increase the debt shown on small business lessees’ financial statements.  This would also cause these small companies to have financial statements that show reduced earnings and reduced capital. 

 

            Second, small business stakeholders advised that the proposed changed standard would add complexity and result in small business lessees with financial statements that are less understandable and comparable than they are under the current standards. 

 

            In a comment letter, Advocacy commended FASB and IASB for their efforts to create a common standard on lease accounting but recommended that the boards develop alternatives that would minimize the burden of the proposed standard on small businesses engaging in shorter-term, less-costly lease transactions.  In particular, Advocacy recommended that FASB and IASB create a de minimis exception to the standard that would exempt lease transactions of less than $250,000 from the proposed standard.

 

 

— Dillon Taylor, Assistant Chief Counsel

1 Comment
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