There are days when I come close to despair.
I've just read about how the accountants want to handle leasing.
Leasing is an attractive business because it gives users the usage of a piece of equipment without having to add it to their capital stock, returning it to the owner when the leasing period is over. It's not exactly rent for that piece of equipment, but rather the customer pays for the depreciation of an asset plus costs plus a profit for the owner of the asset.
As such, it belong to the capital stock of the owner and is a cost for the user. The owner takes it off-balance, as it is part of capital stock and can be taken off-balance, while the user never puts in his balance beyond the simple position in the cost sheet.
Both user and owner are supposed to put leases into their balance sheets "to better judge the potential risks".
Insanity: the effect that this has will be wide-spread and, I sincerely hope, unintended.
Basically, the new rules will require leasing companies to carry the remaining time period of the lease as a debt position, with a review of this debt position (since it is a position that will be carried out in the future) every 3 months as to the ability of their customers to pay their leasing costs. For the leasing customer, the sum that has to be paid yet for the leased good must also enter into the balance sheet because it is a future cost that must be included, as a leasing obligation.
While this sounds like a trivial thing, it is most assuredly not: it will mean that companies which use leasing extensively will see a significant increase in their debt, even though their debt has not, actually and really, changed. Sudden increases in debt levels, however, trigger bank reviews of customer creditworthiness, usually leading to higher costs due to increased risks. Under normal conditions, this is true: however, in reality, nothing has changed.
So what, you say? It's just that in 2013, when this becomes the rule for accountants, the balance sheets of thousands of companies will take a turn for the worse, We're not talking a couple of bucks, but rather an increase of around 25%: there are companies, such as airlines, which will then see their debt skyrocket, as they are heavy users of leased airplanes and equipment. What do I mean by skyrocket?
Well, Lufthansa, for one, had €2.5bn in net debt on its books in 2009, with an additional net leasing obligations of €2.251bn. This new rule means that Lufthansa has then not €2.5bn in debt, but rather €4.751bn, an increase of no less than 90%.
This means, not only for Lufthansa and other airlines, but in general, that in 2013 there would be a significant worsening of cash flows, as leased - not owned, but leased - equipment, buildings and the like have to be included in the balance sheet, even though these are a pure cost and not a capital acquisition.
This could well mean the virtually complete loss of leasing as an alternative to capital spending, meaning not only the loss of jobs in the leasing industry, but also the loss of flexibility in planning, as while today you can expand capacity by leasing something for a short period of time, in the future you'll have to buy the equipment and depreciate it yourself, tying up capital.
It's also sheer stupidity for the real world, since you are worsening the financial shape of a company without them actually doing anything: given the fact that this will hit business in 2013, about when the upswing will finally have reached everyone, it's like tossing a wooden shoe into machinery.
Otherwise called sabotage.
The accountants are clearly out of control. First "mark to market" which destroyed the financial industry during a downswing, now this. Can anyone please tell me what motivates the accountants to make such changes?
Not what they say motivates them (to have a better picture of "true" liabilities and obligations), but what really motivates them? To have power over the economy and force others to do as they please?
David Tweedle, the head of the IASB, once said he'd like to sit in an airplane that actually appeared on the balance sheets of the airline.
What he is going to get instead is no airline, since it can't afford to tie up its capital in something more properly leased. The major US airlines have failed to be profitable because they own their own aircraft: Ryan Air, on the other hand, leases all of its aircraft and is profitable.
I guess he wants a level playing field where nobody makes any money except the accountants.