Accounting change could double debt loads for corporates - JLL

Jones Lang LaSalle Corporate Finance has estimated that the debt loads of a quarter of FTSE all share companies will more than double if what it describes as 'dramatic' proposed changes in lease accounting are implemented.

In a new white paper entitled Perspectives on Operating Leases, JLL warns operating leases as they currently stand would be eliminated under these proposals and all leases would be capitalised on the balance sheet. 'No leases will be spared, including leases signed before a change in standard,' JLL said.

JLL Corporate Finance was responding to the International Accounting Standards Board (IASB) and its US counterpart The Financial Accounting Standards Board (FASB) who jointly issued a discussion paper in March 2009. The discussion paper outlines the proposed changes in lease accounting. A final standard is expected to be issued in 2011, with the new rules possibly coming into effect in 2012 or 2013.

The new rules would mean, JLL said, that all property leases will be on the balance sheet; the 'right to use' a property for a period of time, under a lease, will be considered the asset and the rental commitments considered the liability. For accounting purposes the rental payments will be split between capital and interest (like a loan) so the cost in the profit and loss account will be higher in the earlier years of a lease.

Michael Evans, director of JLL Corporate Finance, said: 'If these proposals are adopted, they will change the way corporations view their property holdings. They will inflate both assets and liabilities, affect profit-and-loss run rates, impact key performance measures including debt covenant ratios and change the overall make-up of corporates' financial statements.'

He concluded: 'If these changes come into force they will have a negative impact on corporates because of the impact on their profits. It will also create a considerable additional administrative burden for companies. However, it should be good news for investors and analysts because there will be greater disclosure in the financial statements.'

Click on the link to read JLL's Perspectives on Operating Leases