Those loans typically contain covenants allowing the bank to demand immediate
repayment when liabilities grow unusually quickly, upsetting, for instance, the ratio of the
company’s debttoequity agreed upon at the time of the loan. Because the new
accounting rules would fabricate trillions in new debt, they would trigger widespread
violations of these covenants. Banks could then pull the loan, demand higher interest, or
require new collateral and guarantees.
Some have proposed a fiveyear transition to the new rules. But this won’t solve the
problem, because many business loans are for much longer terms. Pushing the effective
date of the rules into the future merely delays the impact.
The additional burdens associated with constantly tracking and remeasuring the “fair
value” of leases of every kind, from a business’s office space to the photocopier down
the hall, will hit businesses, and their employees and consumers, directly in the
pocketbook. According to some critics, the accountingrule change would distort the
financial condition of businesses by accelerating expenses over a short timeline rather
than reflect expenses over the life of a lease.
Many private parties have sent public comment letters to the FASB urging it and the
IASB to conduct field tests to see how much it would really cost lessees and tenants to
do all the work the new leasing rules would require. Congress has asked the FASB for a
rigorous costbenefit analysis and field testing to objectively assess the risks of the
accounting changes. Neither has been undertaken. Yet all indications are that the U.S.
and international accountingstandards boards are going ahead with only minor revisions
to their proposal, which may be finalized next year.
In 1973 the Securities and Exchange Commission formally outsourced the job of writing
accounting rules to the FASB. While the SEC is authorized to seek help from private
standardsetting bodies on this issue, the SarbanesOxley Act of 2002 explicitly
reminded the SEC that these quasigovernment agencies can only “assist the
Commission” in fulfilling the SEC’s own responsibility to establish accounting standards
for publicly held companies.
If the SEC insists on relying so heavily on the FASB, then the FASB must adhere to the
same requirements of transparency, public input, and costbenefit analysis the SEC is
required to meet. By law the SEC must analyze whether proposed rules will enhance
efficiency, competition and capital formation, or whether the costs outweigh the benefits.
The lease accounting proposal needs this analysis, but thus far the FASB and SEC have
not even begun it. The SEC must increase its oversight of the FASB on this vital matter
—or Congress will.