The Pains and Gains of the New Lease Accounting Standards

Kimberly Watson, Editor in Chief
September 09, 2010 /

The new lease accounting standards may not look as promising for short-term gains but they are definitely going to be beneficial for the companies in the long run. The new accounting standard not only acts like a reality check for the companies but it also highlights the inherent drawbacks in the process of standard setting.

The importance of accounting standard cannot be denied. Most of the companies do not expose their liabilities accurately with a fear of losing their goodwill but this is unethical and unfair. The new lease accounting standards focuses on revealing the hidden liabilities which are not shown in the balance sheets of the companies. After recession, it has become essential for the companies to show their liabilities so that the investors have a correct picture.

The new accounting standards propose to include both the leased assets as well as liabilities. It has been pointed that leased assets may in fact be helpful in paying for some of the leased liabilities. Hence, the new lease accounting standards would be advantageous in the long run as it would clearly depict the financial condition and prospects of the companies.

Some argue that this may not be necessary at this point of time as operating leases are already shown in the credit ratings of the companies. It has been stated that the new proposal would lead to complexity regarding contingent rentals and renewal options.  It would also impact the asset turnovers as they will lower ratios. Another short-term disadvantage of this new standard is the low returns on capital with an increase in debt-to-equity ratios.

It has been advised by the preparers that it is not proper to hastily adopt the new accounting standards but to weigh the pros and cons carefully before completely complying with it.


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