Moody’s warns on staggered adoption date for lease standard

Credit ratings agency Moody’s has criticised plans to defer the rollout of the new US lease accounting standard for smaller companies and non-profits, saying it will distort comparability of accounts

The Financial Accounting Standards Board (FASB) announced plans to delay the effective dates for the new lease accounting standard for private companies, non-profits and small reporting companies by a year to 2022. This is only the second time the US standard setter has opted for a staggered rollout of a new standard, an approach last used for the revenue recognition standard.

The proposed delay would significantly increase the gap between the first adopters of a standard – primarily larger, public companies – and the smaller companies by two to three years.

‘The proposal – initiated to give smaller companies more time to implement the new accounting changes – would hinder the credit analysis process by compromising comparability between public and private issuers and delaying, for adoption laggards, the enhanced disclosures these new standards bring,’ says Kevyn Dillow, a senior accounting analyst at Moody’s.‘Such delays will hurt reporting transparency, affecting a swath of non-financial corporates across different sectors.’

The staggered adoption date approach is a new phenomenon. Prior to the issuance of the new revenue standard in 2015, separate adoption dates were not designated for distinct types of reporting entities. Based on comments made at a board meeting in July, FASB indicated that it may be considering broadly using this adoption practice for all new accounting standards.

‘Standardising such a practice would obstruct comparability, which would harm credit analysis beyond the current proposal,’ said Dillow.

‘This is a long-requested improvement to accounting standards that is being changed at the 11th-hour. We view this change as disruptive because, along with other financial statement users, we have been preparing for these changes to go live on the previously announced date.

‘The proposed delay for leases, hedging, and CECL comes less than six months before the scheduled adoption for some companies, when in fact the issuance of these three new accounting standards by the FASB has been in the works for many years. For instance, the change to accounting for leases, ASU 2016-02 Leases, was issued over three years ago in February 2016 and the project has been ongoing for over a decade.’

The new lease standard includes rules governing new accounting for leases, credit losses and hedging, which came into effect for large listed companies reporting under US GAAP from 1 January 2019. The equivalent International Financial Reporting Standard (IFRS), IFRS 16 Leases, is already in operation, affecting all company reporters accounting under IFRS for accounting periods effective 1 January 2019.

The new lease standard, which brings operating leases onto the balance sheet, has the most significant impact on non-financial corporates, in particular, retail, restaurants, utilities and airlines. New standards require enhanced disclosures and increased transparency for the companies adopting the measures.

Sara White

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