Monthly Archives: August 2010

Proposed Accounting Standards May Require Operating Leases to be Recorded on the Balance Sheet

Currently, lease accounting requires certain leases to be recorded as assets and related liabilities for payments due when the terms of the lease meet certain criteria that in substance makes them similar to a purchase. In general, leases that do not meet this criteria are considered operating leases. Operating leases are considered to be executory contracts that do not result in obligations (liabilities)and therefore the payments due in the future under such leases are disclosed only in the footnotes as commitments and no assets are recorded on the balance sheet. Approval of this proposal may cause assets and liabilities on balance sheets to increase significantly. Since assets are depreciated using various methods while lease liabilities are amortized based on the interest rate and payments made, this change to lease accounting will likely change certain key company ratios such as the current ratio which provides indications of liquidity.