Summary:
In summary, the article talks about the Financial Accounting Standards Board and the International Accounting Standards Board on their collaboration of generally accepted accounting principles (GAAP) to the international standards. Two boards have already issued a new standard that requires companies to book leases as assets and liabilities on their balance sheets. This new standard may result in weakening companies in the view of investors, activating debt covenants with lenders and it could also affect credit ratings. Although the change is meant to stop “significant off-balance-sheet activity for leases” looks more like it will ripple effects in the leasing market instead of what the two boards initially expected it to achieve.
Connections:
Three major connections I made between the article and the textbook are: the Financial Accounting Standards Board, International Accounting Standards Board and generally accepted accounting principles (GAAP). The Financial Accounting Standards Board sets accounting standards for US while the International Accounting Standards, an independent, successful, private-sector body who is funded by donations to merge their GAAP standards. All of which was also mentioned in the textbook, to develop a single set of financial reporting standards and to bring a better understanding among countries. Generally accepted accounting principles basically are a set of accounting recommendations and guidelines for financial accounting information, of what both the standards board are getting to accomplish one set to work from.
Reflection:
I disagree that the FASB is correct on trying to resolve the “significant off-balance-sheet activity for leases” by changing the GAAP accounting. This change will not only affect already struggling companies under heavy debt load but also the whole leasing market will be at a grand downfall as well. Analysts are even contributing to the many complicating factors of changing the GAAP accounting. From what I understand the change will just add on to the mounts of debt that companies already have and it’ll just give more complications to those dealing with leases. Although there is kind of a bright side to the new accounting standard of being considered the right to use the space being leased for a certain amount of time and to eventually reduce the debt over the term of the lease.. How long will eventually be? Other businesses might not afford the wait for an eventual reduction, especially with everyone trying to recover from the recession nowadays.
I would actually support this new accounting standard because transparency in what companies are doing with their leases and what they even "consider" as a lease can vary greatly. Therefore companies could be doing all sorts of things not accepted by the FASB, IASB, or GAAPs. They could be working "on the line" or "on the grey side of things" compared to the black and white accounting standards. I think it's important that a rule or something more structured is made to clarify things using leases. So, I think it is a good thing in the long run. I mention "in the long run" because I also understand that America's economic state is in recession, and having to guess your future liabilities is a very hard thing to do and takes a lot of time, especially for retailers and commercial banks. My suggestion is to keep this new accounting standard work in progress, but extend the actual publishing year to 2014 or 2015. That will hopefully give them more time to work things through and prepare for the new change.
ReplyDeleteOn a side note, please refer to my blog article about Wall Street. It stresses the importance for companies to be more transparent about what they do for things that have a little more "latitude" on rules, ethics, and such. It will definitely be beneficial for customers and just keep in mind that everyone will always be a customer to someone else in the world.