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Thursday, 19 August 2010 20:14

Accounting change threatens IT leases

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A proposed change in international accounting rules could challenge the widespread use of computer operating leases by large enterprises and may also prompt users of cloud computing services to review the terms of their service contracts.

The International Accounting Standards Board has just released an exposure draft proposing that operating leases be included on corporate balance sheets. 

According to Keith Reilly, a partner with accounting firm Grant Thornton, enterprises previously have been able to choose whether or not they include all their leased assets on their balance sheets. While finance leases had to be included, companies could choose whether or not to include operating leases on the balance sheet.

Under an operating lease the user never actually owns the equipment - but pays a fee to use it over time.

While the changes would affect companies with operating leases on big ticket items like mainframes or multifunction printers they are unlikely to have much impact on users of cloud computing or infrastructure supplied as a service according to technology mediator and strategist, Phil Argy from Argystar.com.

'At first glance this might not cover fully outsourced services such as a cloud service agreement,' said Mr Argy, who claimed that such arrangements would be covered by the services agreement. However he acknowledged that there; 'Are potentially people that have their whole computer hardware supplied under operating leases - like aircraft,' and who would eventually have to account for those leases on their balance sheets.

According to PricewaterhouseCoopers which yesterday issued an alert about the accounting changes; 'The proposed model will eliminate off-balance sheet accounting. All assets currently leased under operating leases will be brought onto the balance sheet, removing the distinction between finance and operating leases.


'The new asset − representing the right to use the leased item for the lease term − and liability − representing the obligation to pay rentals − will be recognised and carried at amortised cost, based on the present value of payments to be made over the term of the lease.'

Accountants suggest the changes could be introduced in 2012 - 2013. While still a way distant, for those organisations currently negotiating three or five year operating leases, the looming changes could have a significant impact.

The international accounting standards currently apply to listed Australian companies - although according to Mr Reilly there are proposals that they be implemented more widely by 2013. He said that companies with financial statements recording revenues of $25 million and above and $12.5 million in assets would likely be netted by the changes.

For these companies the issue was that; 'If you put your operating leases on the balance sheet your assets might look a bit skinny and you might have to file with ASIC,' he warned.

While the changes would not have an immediate effect, he warned that companies needed to be aware of the looming changes when negotiating leases which stretched out to 2013 and beyond.

According to Gartner analyst Robin Simpson the major impact of the accounting changes was only likely to be felt by large enterprises. 'I doubt there will be any impact on small business,' he said.



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