The FASB (Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) recently announced a joint project to rewrite the lease accounting standard. The FASB and IASB have tentatively concluded that virtually all leases should be reported on the balance sheet. But most leases are currently considered off balance sheet financing. In an recent interview conducted by Chain Store Age, they explain how these new rules could impact retailers in a big way.

For example, a majority of store leases set by retailers can be 15 or more years, especially if you are including renewal options. But they are often structured as operating leases. By treating these now as capital leases, the impact on the balance sheet could be substantial.

Georgia Tech recently conducted a study showing the potential impact on retail companies. They estimated a median 5.3% decline in reported earnings for fiscal year 2006. The impact on the balance sheet was considerably greater: 14.6% increase in assets, 26.4% increase in liabilities. This would be a significant hit to financial ratios. These changes may mean that growth requires more capital to meet loan covenants and investor expectations. For some companies, the effect could be several times the median, depending on how they do their leasing.

FASB plans are expected to release an exposure draft later this year with a final standard in 2009. Projections when this would take effect could occur at the start of 2011. For retailers in strong financial positions, the consideration of whether they should lease-vs.-buy could tilt more to buying real estate. According to reports, there is a large discrepancy between reporting; some retailers report a large number of capital leases or owned stores, while others have none. As a result, these changes could be viewed as good or bad depending on your organizational structure.