Bring them on!; Public support from investors mounts for bringing leases on-balance
On 24 October 2013, the Capital Markets Advisory Committee (CMAC) took an unprecedented step to send a formal recommendation to the International Accounting Standards Board (IASB) on its efforts to put lease obligations on-balance. The CMAC is an independent global think-tank of investors that advises the IASB. The recommendation contains a unanimous statement of support for the IASB and FASB’s proposals on lessee accounting. The CMAC also explicitly advises against a ‘disclosures-only’ solution. Such disclosure-only solution would produce financial statements that are, for most investors, an inferior starting point for their financial analysis. Besides, a disclosure-only solution would not reduce costs for preparers because it would not remove the need for the costly gathering of information.
A disclosure only solution for leases is comparable with ordering lasagne, and instead of getting lasagne, you are supposed to be happy with the individual ingredients being served… thanks, but no thanks.
CMAC’s positive formal recommendation succeeds a rather negative view published by an investor group advising the FASB. The ‘Investor Advisory Committee' surprised both the leases project’s friends (mostly investors) and foes (predominantly lessor companies and some preparers). Especially, because this negative advise is not in line with the positive feedback that the leases project received from the majority of investors on the basic question whether leases should be visible on the face of the primary financial statements.
On 14 October 2013, the CFA Institute added to the list of support for leases being reported on-balance.
Let’s all keep in mind that the purpose of financial statements is to provide useful and cost effective information for investors. It is external reporting for investors, not a report for management. Some forget that even though the preparer pays the bills for financial reporting, it is the investor that ultimately bears these costs. Cost effectiveness of financial reporting therefore should incorporate both the costs of reporting paid by preparers, and the costs that investors make to analyse these useful reports.
My take is that where resistance against leases on-balance is highest, this improvement is likely to be needed most.
In short: bring them on!
Martijn Bos is policy advisor audit & reporting Eumedion, co-chair of IASB’s independent Capital Markets Advisory Committee and member of the Dutch Accounting Standards Board