New Accounting May Prompt Shift to Short-Term Leases, Fitch Says

Accounting changes that would require companies to report more of their leases as assets and liabilities may encourage businesses to structure shorter-term rental agreements that could hamper the ability of lessors to predict cash flows, according to Fitch Ratings.

“Companies may push for more short-term leases to avoid putting them into the accounts,” John Boulton, an analyst at Fitch in London, wrote today in a report. While any ratings impact would probably be “minimal” because analysts already treat off-balance-sheet leases largely as debt obligations, a shift to short-term contracts “would be credit negative for lessors,” he wrote.

The International Accounting Standards Board and the Financial Accounting Standards Board last week proposed rule changes in an effort to improve transparency for a company’s leverage, assets and risks to which it is exposed from entering into leasing transactions. Most leases aren’t currently reported on a lessee’s balance sheet, a system that has been criticized for not fully reflecting a company’s finances.

The new standard, which is open for public comment until Sept. 13, would require a lessee to recognize assets and liabilities for leases of more than 12 months, IASB and FASB said in the May 16 statement.

“The global move to a single leasing model and additional disclosures should enhance comparability, and would be positive for credit analysis,” Boulton said in the report. “Extra information about the leased assets can help analysts better understand the economic substance of the arrangement.”

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