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FASB under political heat from Congress over lease accounting

May 29, 2012

U.S. and international accounting rule-makers have been struggling for years to come up with a common standard for lease accounting. Now they have a new hurdle: U.S. lawmakers.

Sixty members of Congress, led by representatives Brad Sherman, a Democrat, and Republican John Campbell, have written to the U.S. Financial Accounting Standards Board warning of dire economic fallout from a plan to have companies put leases on their balance sheets.

The business lobby’s handiwork was evident in the congressional letter on leases. The letter relied heavily on a report commissioned by the U.S. Chamber of Commerce and other trade groups earlier this year. That study said the leasing changes could destroy up to 3.3 million U.S. jobs, or at least 190,000 in the best case. U.S. gross domestic product would fall by $27.5 billion to $478.6 billion a year.

The study assumed that companies’ costs of raising money would rise as lease obligations made their balance sheets look riskier. In turn, companies would cut spending and slash jobs.

The study came under sharp fire from accounting experts, however, who said it ignored crucial facts.

A history of congressional intervention on accounting

Congress has a long history of trying to influence accounting standards.

During the financial crisis of 2008 and 2009, lawmakers pressured FASB to change a mark-to-market accounting rule that forced banks to write down billions of dollars of assets that were cratering in value. FASB relaxed the rules after Congress threatened legislation to intervene.

In 2003 FASB met fierce opposition from Congress against its plan to have companies count stock options as a business expense. FASB stood its ground and passed the rule in 2004.

The lease standard has been contentious from the start. It would affect businesses of all kinds, from airlines, which lease many of their aircraft, to retailers and restaurant chains.

The last thing FASB needs

Pressure from lawmakers is the last thing FASB needs. The board is close to an agreement with its international counterpart, the International Accounting Standards Board, on how to account for leases, one of a handful of key rules the standard-setters are trying to craft together.

The boards want to reach agreement on several crucial accounting rules to pave the way for a shift by the United States to international standards – a goal that is already on shaky ground. U.S. regulators have been reluctant to commit to international standards in total and seem likely to have FASB weigh each rule individually over a number of years.

If FASB were to backtrack on the leasing standard now, it would fuel skepticism that the United States will ever reach common ground with international standard-setters.

A bigger issue is FASB’s independence from political influence. It was set up as a private body, under the oversight of the Securities and Exchange Commission, to put standard-setting in the hands of accounting experts.

Congress has the right to intervene – it threatened to do so in the mark-to-market debate – but investors would quickly lose trust in financial reports designed by lawmakers and influenced by business groups.

Congress criticized

Accounting professors Anthony Catanach and J Edward Ketz took issue with the study cited in the lawmakers’ letter, pointing out in their blog, Grumpy Old Accountants, that many analysts, investors and rating agencies already take leases into account when evaluating a company’s risks.

“The information is already impounded in stock prices and interest rates,” the professors wrote. That means the accounting change may not cause the rise in cost of capital the study warned of.

The change in the accounting rule would simply force companies to measure and report their own lease obligations, resulting in more accurate figures than analysts come up with on their own, they said. More importantly, lease obligations are real debts and belong on the balance sheet, they said.

“If there is a change, it will occur for unsophisticated users who are fixated on reported numbers, and this includes government workers and politicians,” they said.

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