60 Members Sign on Letter to FASB
Washington DC – Democratic Congressman Brad Sherman, CPA (D-Sherman Oaks), and Republican Congressman John Campbell, CPA (R-Newport Beach), both senior members of the House Financial Services Committee, have sent the attached letter to the Financial Standards Accounting Board (FASB) urging a careful rethinking of proposed rule changes that, if enacted, could have disastrous consequences for American businesses and the real estate industry. Sixty members of Congress from both sides of the aisle signed the letter.
“As one of only a few certified public accountants (CPAs) in Congress, and a co-founder of the bipartisan, bicameral Congressional CPA and Accountants Caucus, I have a unique understanding and the utmost respect for FASB’s independent process for developing sound accounting standards,” said Sherman. “That’s why I helped lead this effort in Congress to make sure that FASB carefully considers the potential consequences of this proposal.”
Under a recent FASB and International Accounting Standards Boards’ (IASB) joint lease accounting proposal (File Reference: No. 1850-100, Leases (Topic 840)), U.S. companies that lease office, industrial, and retail space would be required to capitalize the costs of their leases—just as if they purchased the property—onto their balance sheets. Currently companies record the costs of their leases as a business expense.
An independent study estimated that this change will add over $1.1 trillion in leased real estate assets and liabilities onto businesses’ balance sheets.
“Investor protection and financial disclosure are always paramount,” said Sherman. “However, forcing companies to capitalize the full value of their leases will explode many companies’ balance sheets overnight, especially small businesses, who already book their leases as an expense on financial statements. Capitalizing these leases will throw off debt-to-capital ratios, ruin credit ratings and force many companies to pay higher interest rates. As a result, most companies will naturally try to reduce the size of their leases by shortening leasing terms, which will increase costs for real estate owners and managers forced to renegotiate complex leases every 6 or 8 months.”
The Sherman-Campbell letter insists that FASB undertake and publish a comprehensive study of the costs of this proposal before any final action is taken.
Read the Full Letter Below:
May 22, 2012
Ms. Leslie Seidman, Chairman
Financial Accounting Standards Board
401 Merritt 7, P.O. Box 5116
Norwalk, CT 06856-5116
Dear Chairwoman Seidman,
Accurate and transparent financial reporting is the cornerstone of global capital markets. We believe that a formal and open cost-benefit analysis should be an integral part of the financial reporting standard setting process.
Nonetheless, we are very concerned with the unintended economic consequences of the Financial Accounting Standards Board (FASB) and International Accounting Standards Boards’ (IASB) joint lease accounting proposal (File Reference: No. 1850-100, Leases (Topic 840)) and subsequent updates to this exposure draft. According to a recent study released by Chang & Adams Consulting, the current lease proposal would negatively impact job creation, the health of the U.S. commercial real estate sector, loan covenant agreements, and liabilities of U.S. publicly traded companies.
The report analyzes the current lease proposal under a best case scenario estimated its economic impacts as: (1) increasing liabilities for public companies by $1.5 trillion; (2) increasing costs to U.S. public companies by $10.2 billion annually; (3) potentially leading to job losses of over 190,000; (4) reducing U.S. household earnings by $7.8 billion annually; and (5) lowering U.S. GDP by $27.5 billion each year.
The results of the Chang & Adams study, along with others, indicate the need for FASB and IASB to fully analyze the economic ramifications of lease accounting rule changes. Real estate is the cornerstone of our economy; however, the commercial real estate market continues to be negatively impacted by high unemployment levels, low consumer confidence, falling property values, and a contraction in lending. A further disruption of this market will have serious negative consequences.
Furthermore, we believe it is imperative that FASB and IASB undertake and publish an all-inclusive economic impact study before any final action is taken on the lease accounting proposal. The study should examine all potential economic consequences for businesses that own, invest, and rent commercial real estate. This should include, but not be limited to possible effects, such as higher rents, further reduced property values due to shortened lease terms, administrative costs and problems resulting from obscured financial reporting, which were not calculated under the Chang & Adams study. Additionally, the potential increase on borrowing costs for all commercial real estate participants as well as the financial and regulatory impact on lending institutions must be fully examined. Finally, field testing should be undertaken to identify any further potential economic consequences before the proposal is finalized, as well as in the pre and post implementation phases of the final standard.
Thoroughly vetted and sound accounting standards are needed to create certainty in the marketplace for investors and businesses alike. A comprehensive examination of the costs and benefits should be a part of that process.
John Campbell, CPA Brad Sherman, CPA
Member of Congress Member of Congress
CC: The Honorable Mary L. Shapiro, Securities and Exchange Commission Chairman
The Honorable Hans Hoogervorst, International Accounting Standards Board Chairman
Republican Co-Signers (23)
Democratic Co-Signers (37)
Wm. Lacy Clay