Assurance

Over 52% of SA executives unaware of pending lease accounting changes

Over 52% of SA executives are unaware of pending changes which will affect the reporting of leases and which will markedly alter balance sheets, thereby inter alia impacting debt-to-equity and return-on-investment ratios.

That’s according to Grant Thornton’s 2013 International Business Report (IBR), which surveyed 3450 businesses across 44 economies regarding the proposed new lease accounting standard set to come into effect in 2014.

“Amendments to this leasing standard will have far reaching consequences for a large proportion of SA businesses particularly companies in the airlines, manufacturing, mining or retail sectors – industries where many equipment and property leases are held,” said David Reuben, partner and head of Assurance at Grant Thornton Johannesburg.

The new Lease Accounting Standard, which is currently in its draft format, is expected to require that companies reporting under International Financial Reporting Standards (IFRS) will now need to record billions of rand of new assets and liabilities.

“This new standard from the International Accounting Standards Board (IASB) and the Financial Accounting Services Board (FASB) will require that all leases other than short-term leases will have to be reported on the balance sheet,” said Reuben. “It has the effect of broadening the definition and perceptions of what an asset and liability is.”

Towards the end of 2012 the US Securities and Exchange Commission estimated the “undiscounted value of future lease payments among US-listed companies alone were more than $1.35 trillion (R11.3 trillion)”. At this stage, Reuben said it would be difficult to estimate a similar value for SA companies and the impact on their balance sheets would still need to be calculated.

According to the IBR report, the average business globally holds 20 leases. The average was highest in Sweden (68 leases per business), followed by Japan (49 leases per business), Finland (39 leases per business) and Australia (25 leases per business).

In South Africa, Grant Thornton’s research indicated that nearly 85% of SA businesses surveyed currently hold leases, with 51% holding less than five leases, while 15% reported holding more than 10 leases in their businesses.

Reuben expressed concern about the lack of awareness amongst SA businessmen surveyed (52% are unaware of the upcoming changes), regarding these amendments.

“It is encouraging to note though that SA executives seem to be marginally more aware of the pending lease accounting amendments than their global and BRIC counterparts,” said Reuben.

The IBR survey revealed that 47% of SA executives were aware of the upcoming changes, compared to 42% globally, and just 21% in the BRIC region.

Awareness of the change was greatest in the US (75%), India (70%), Chile (60%) and the UK (56%), and it was lowest in Lithuania (8%), France (13%), Brazil (13%) and mainland China (13%).

In terms of what impact these changes would have on businesses, 34% of SA executives believe that the amendments would increase transparency for investors, while 28% are expecting the new standard to increase the cost and complexity of reporting.

Ed Nusbaum, Grant Thornton International CEO says that the current lack of transparency around operating leases certainly needs to be addressed, and in light of this he welcomed the pending lease accounting amendments.

“The information in the financial statements currently does not provide complete, readily understandable information about the obligations associated with operating leases,” said Mr Nusbaum. “But change for the sake of change is not the goal. A new standard that is not based on clear, consistent principles could actually make things worse. A major change to lease accounting is a once in a generation event and the Boards need to be patient to get things right.”

The leasing project began with an exposure draft published in 2010 and a great deal of discussion has followed it. When the draft finally is issued as expected by May / June 2013, it will be put out for public comment for a period of 120 days which would presumably end in September, according to a FASB spokesperson. If this timeline is followed, the revised standard would be issued in 2014.