Grant Thornton global business survey finds 57 percent of Canadian businesses are not aware of pending lease accounting changes

"Once-in-a-generation" change means businesses, investors and analysts could see substantial impact to the balance sheets of Canadian publicly-held companies that have a significant number of operating leases, such as rental of premises and equipment

TORONTO, Nov. 14, 2011 /CNW/ - According to research from Grant Thornton's recent international business report, 57 percent of businesses in Canada1 are unaware of one the most impactful global accounting changes in the past decade - a proposal to move all but very short-term leases onto the balance sheet for Canadian publicly-held companies.

The proposed changes will eliminate off-balance sheet accounting for operating leases, which will ultimately mean that financial statements will be adjusted to reflect the liabilities resulting from operating leases. Current International Accounting Standards Board (IASB) and US-based Financial Accounting Standards Board (FASB) lease accounting requires lessees to classify their leases as either operating leases or finance leases, but this can lead to different accounting for economically similar transactions.

The global survey of 2,800 publicly-traded and privately-held businesses, completed by Grant Thornton International in September 2011, showed that 54 percent of businesses surveyed globally were aware of the change, with greatest awareness in the US (69 percent), Mexico (68 percent) and Chile (63 percent), and lowest awareness in mainland China (5 percent). The results also found that, of those who were aware of the changes, 33 percent thought it would increase cost and complexity, while only 15 percent thought it would increase transparency. Twelve percent of businesses surveyed indicated they would alter the way they structure leases in the future.

Although there are legitimate tax and legal advantages to lease financing, too many transactions have been structured for the purpose of arriving at a desired accounting treatment. In some cases, these amounts could be significant. The US Securities and Exchange Commission has estimated the undiscounted value of future lease payments among US-listed companies alone at more than US$1.25 trillion. Furthermore, the current balance sheet does not present a complete and transparent financial picture. Basic analytical tools like return on investment and debt-to-equity ratios are useless when the debt is not on the books. Before conducting even elementary financial statement reviews, users must look to the notes, and then make their own adjustments to published accounts based on what is, in many ways, incomplete information.

Though the proposed changes will primarily affect publicly-held businesses in Canada at this time, accounting standards are constantly under review and this change could potentially impact private companies in the future. Businesses and investors should be aware of the proposed changes so that they can assess any potential impact.

The  IASB and FASB released the first Exposure Draft of these changes in 2010, and are set to re-expose their latest proposals early next year. With these new standards expected to become final soon after, Grant Thornton stresses the need for Canadian businesses to assess the impact of the potential changes and for investors to consider whether the new model will deliver the transparency they are rightly calling for.

"There is no question that a global review of lease accounting is long overdue," said Grant Thornton International CEO Edward Nusbaum. "The lack of transparency with regard to leases has festered for years, but a major change to lease accounting is a once-in-a-generation event and the IASB and FASB need to be patient to get things right. Our survey findings should give the Boards pause for thought as businesses are seeing costs and complexity in the proposals but are questioning whether there is any improvement in transparency. Some of the proposals we've seen could create a different set of incentives to structure leases to achieve desired accounting outcomes. Change for the sake of change is not the goal, and a rush to a new standard could actually make things worse."

"We desire a new standard that is practical for business - avoiding undue complexity and excessive estimation uncertainty," adds Bo Mocherniak, Grant Thornton LLP Partner and leader of the firm's Canadian real estate practice. "Investors need transparent, comprehensible information on leasing obligations and also on the related costs. The most critical thing now is that affected businesses and investors engage with the process to help ensure these goals are achieved."

About Grant Thornton in Canada
Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms operate in close to 100 countries worldwide.

Bo Mocherniak, Partner, Grant Thornton LLP in Canada is available for comment and analysis.

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1 While Grant Thornton International's global survey included both publicly-traded and privately-held business, in Canada the lease accounting changes proposed by the International Accounting Standards Board and US-based Financial Accounting Standards Board will only affect publicly listed companies and other entities that are required or choose to apply IFRS. Privately held businesses that adhere to Canadian Accounting Standards for Private Enterprises will not be affected.


SOURCE Grant Thornton LLP

For further information:

Tania Freedman
Senior Manager Media Relations
Grant Thornton LLP
Phone: 416-607-2745
Email: tania.freedman@ca.gt.com


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