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New analysis outlines flaw with lease accounting proposal

Lease accounting rules could cost businesses in the early stages

An analysis of new proposed accounting standards governing equipment leasing from CFO magazine indicated that companies that lease equipment could see their profits shrink during the first few years of a contract.

The June 13 standards update proposal from the Financial Accounting Standards Board and the International Accounting Standards Board would require companies that lease equipment to account for depreciation and interest in their financial reports. Kim Lamplough, a partner in the assurance division of Marcum LLP, told CFO how the rule would negatively impact businesses.

“There would be a use component and an interest component," she said. "As with any financing, the interest charges are heavier at the front end because the principal amount is higher, so the interest component that’s going to go through the income statement related to those leases is higher at the beginning than at the end.”

Recognizing that this approach could provide an unbalanced view of a company's liabilities, the FASB and IASB have also proposed a guideline that would report the costs associated with a lease evenly over the course of the contract period. This approach is particularly favored by businesses that lease property.