Recommended By: Carl Kampel
The proposed changes to lease accounting have gone through a number of iterations, and the closer to getting to a final standard is still in some state of uncertainty. There has been general agreement between the Financial Accounting Standards Board and International Accounting Standards Board that leases now classified, as operating leases will likely be recorded as assets and debt on the balance sheet of lessees. The likely effect is loan covenants related to leverage will be violated. Lenders often include leverage covenants, such as debt to equity ratios, as a barometer of the risk the lender is willing to tolerate under the loan. Generally, the higher the borrowers ratio of debt to equity, the greater the lender perceives the risk profile of the loan. The new standard, when adopted, will create debt on the balance sheet of borrowers, which was not previously recorded. Both lenders and borrowers will need to adapt to different metrics in evaluating the risk profile and credit worthiness of borrowers.
Carl Kampel is Director in charge of professional standards at Ellin & Tucker, Chartered. He is a Member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Accounting Standards Executive Committee. He is also past President of the Baltimore Chapter of Financial Executives International. He can be reached at firstname.lastname@example.org and 410-727-5735.