On August 27th, I met with my fellow members of the FASB’s Investor Advisory Committee (IAC) to discuss the proposed treatment of operating leases on the balance sheet by the Financial Accounting Standards Board (FASB). As regular readers know, I firmly believe that operating leases are a form of off-balance sheet debt that should be considered when calculating invested capital and shareholder value.
However, after discussing the issue with my fellow committee members, we came to the conclusion that we could not support the current proposal. The proposal would add too much complexity, forcing investors and analysts to unwind the accounting construct on the balance sheet just to do their own analysis. Operating leases are complicated instruments, and this one size fits all treatment is not an effective way of recording them.
We did recommend that the FASB increase disclosure requirements about operating leases. My feeling is that investors should have access to all the data, and they can do with it what they want. As long as investors know where to find the data on operating leases, they can perform their own analysis.
For more information on the IAC decision, check here and here. I was even quoted on the issue by a Russian website. It’s good to see such a large interest from the investing community in the standards for financial accounting.
As the primary expression for business performance, accounting and the rules that govern it play a critical role in our capital markets. Without good accounting, investors would have no way of measuring profitability or assessing valuation. It is very important to the integrity of the capital markets that regulators implement good rules and guidelines. Moreover, transparency is critical to understanding businesses. Accounting rules should always try to encourage more transparency and deter behaviors that obfuscate performance.