Monday, July 28, 2014

Rep. Sherman Pressing to End FASB Lease Accounting Initiative

At a recent hearing of the House Financial Services Committee, Rep. Brad Sherman (D-CA) pressed Fed Chair Janet Yellen to help him kill the FASB initiative to change the lease accounting standard, which he said is an effort to fix something that is not broken. While he is aware that the Fed does not have direct oversight of FASB, he hopes that the Fed will use its tration powers of persuasion to get FASB to drop the project. Chair Yellen said that she would look into the issue. Similarly, at a recent Capital Markets Subcommittee hearing, Rep. Sherman pressed SEC Corp Fin Director Keith Higgins to help end FASB’s lease accounting initiative. While the Corp Fin Director has no direct authority over FASB, the SEC does as it recently reiterated in the release adopting the money market fund reforms. In giving its position on cash equivalents and US GAAP, the Commission said that a more formal pronouncement to confirm this position was not required because the federal securities laws provide the Commission with plenary authority to set accounting standards.

Noting that FASB is funded by the SEC with a mandatory tax through a convoluted process designed to claim that it is not a government agency, Rep. Sherman filed an amendment to the SEC spending bill, H.R. 5016, that would deprive FASB of the funds to implement and enforce a new lease accounting standard. While he ultimately withdrew the amendment, Rep. Sherman said on the House floor that FASB wants to list on every balance sheet the future amount that will be paid in all lease payments as a liability, which would increase the liabilities shown on the balance sheets of U.S. businesses by $2 trillion. For 100 years, the U.S. has had a good standard on how to account for leases, he pointed out, under which the tenant pays rent, the owner of the building owns the building, and the financial statements disclose in the footnotes all the details any financial analyst would want to see. (Cong. Record, July 15, 2014, H6268).

Rep. Sherman said that an additional disadvantage of this accounting proposal is that it will cause tens of thousands of businesses to be in violation of their loan covenants, which means that they will have to immediately pay off their liabilities or renegotiate with their bankers, who will insist upon higher personal guaranties and higher interest rates. Moreover, thousands and thousands of long term bonds that have been sold in the public market will be held to be in violation of their loan covenants and will become immediately due because the accounting standards changed.

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