10 ms·

$3 Trillion in Forgotten Debt

229 points by gscott 9y ago

zaroth 9y ago
If you're accounting for future lease obligations as debt, then I think you somehow have to account for future exclusive use of the thing you are leasing as an asset. It's easy to value the future lease obligation -- monthly payment * remaining term. But without a way to value the corresponding leasehold this change seems like it just distorts financials in a way that makes the data less useful.
- kpwagner 9y ago
  There is such a thing as a "capital lease", or at least there used to be. Capital leases work in this way--both asset and liability are recorded. It's only fair that the new rules for operating leases works this way too.
- fitchjo 9y ago
  I would like to caveat by explanation by saying I am admittedly less versed in IFRS than US GAAP, so there may be some technical differences between the two, but the spirit should be the same - there is actually corresponding gross up of your assets, equal to the net present value of your minimum lease payments, when you put the lease obligation on your balance sheet. So at the the time you sign a new lease, you will put an asset and liability of equivalent value on the books. Assuming the useful life of the asset extends past the lease term, general expectation is that the asset value would be amortized over the term of the lease, and at the same time, interest expense will be recorded on the lease obligation. Ultimately the same amount of expense will be recorded (equal to the minimum lease payments), but the timing of the expense is different as it front loads the expense (because of the interest accretion). So you have that and the balance sheet gross up that will be different. The change, in theory, provides greater transparency related to what can be a significant obligation for a company.
  - lucas_membrane 9y ago
    > the timing of the expense is different as it front loads the expense (because of the interest accretion) I would expect that if a firm could make a good case to its auditors that the revenue derived from the use of the leased asset was expected to be higher during the early years or lower during the later years, or vice versa, then the auditors would allow a timing adjustment somewhere. If my corporation has just signed a 12-year operating lease for some property in Los Angeles with the intention of profitably obtaining revenue from the property only during the 2028 Olympics, do these accounting rules lock me into such unrealistic reporting? Many years back, I spent quite a bit of time on similar but different issues of recognition of revenue and expense, and it seemed that if one could make a good case, there was flexibility, but everyone wanted to abuse it. Is the flexibility still available in reasonable cases, gone now in general, or gone only for specific classes of contracts like operating leases?
- teekert 9y ago
  It bothers me that I have Ph.D. yet I understand only about every third word in your comment and nothing of the whole thing.
  - narvind 9y ago
    I see what you did there ;)
  - johnthomas00 9y ago
    He said if you are going to count the monthly rent against a renter, you have to count the value of the place to live too.
  - defen 9y ago
    If I (a company) sign up for a 10 year lease on a retail space, at $10,000 per year, it's easy to see that it's a $100,000 obligation (ignoring things like present value of money etc). Apparently (according to the article; I'm not an expert on this) that $100,000 obligation does not appear on the balance sheet. The new IFRS 16 rule means that it will; so companies will now have a lot more debt. Grandparent commenter was asking "how do you assign a dollar value to the exclusive-use value of that lease" - for example maybe the neighborhood where your shop is suddenly became really popular, so you're locked into a below-market rent for the next 8 years.
    - abritinthebay 9y ago
      It's an interesting objection but I don't see why you'd have to assign a dollar value to it. Yes you might be overall doing well compared to other possible options but that doesn't change that you're still owing $100k. Perhaps I'm not understanding the objection but it seems like an unfounded one.
      - toast0 9y ago
        You owe $100k, but you also have something of value (worth approximately $100k when the lease was entered, but should be adjusted for transaction costs of subleasing). Over time, your payments reduce the debt (this balances out), but the asset also reduces value, which reduces your overall balance. Adjustments for marketability of the leased property should also be made. If the property isn't marketable, maybe the current asset value is $0, but that's rarely the case.
- sologoub 9y ago
  That seems to be what it's already requiring: "Under IFRS 16, a lessee is required to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments." https://en.m.wikipedia.org/wiki/IFRS_16 https://en.m.wikipedia.org/wiki/IFRS_16
  - jasode 9y ago
    At meta level, it would be interesting to know why IFRS chose the philosophical position that the lease remaining unpaid term is a "debt". It seems like another valid way to look at the lease (for renting space) is to consider it a "call option" on a agreed upon price with an expiration date. Therefore, you don't count the whole lease as a bank-like debt but instead, count the "lease termination" fee. (Or maybe I'm taking the examples discussed in HN too literally and the actual IFRS text already covers both situations and the company can choose to record "remaining term" or "termination fee" -- whichever is the lower amount. The termination fees for equipment like airplanes and tractors is higher percentage (must pay remaining residual value) than office space which makes it behave more like a "loan".)
    - vpribish 9y ago
      if there's a way out of paying it other than default that's an interesting notion. option-pricing models are a bit more complex than accounting seems to like though. seems like an opportunity for a data-vendor or hedge fund: option pricing of leases for improved valuation models. hmm...
    - jeffdavis 9y ago
      For accounting you probably want to keep it simple. Accounting should be a baseline sanity check to keep numbers somewhat in line with reality. It's not meant as a valuation model.
      - jasode 9y ago
        >It's not meant as a valuation model. That's not my intention. I'm staying within the bounds of plain accounting for the concept of "debt liability". If a company has a 5 year lease of $1000/month rent, I think the new accounting rules says it's a 60x$1000=$60000 "debt". But in my mind, the company really isn't on the hook for all $60k. If the company has an "early termination" or "lease buyout" clause that they can exercise at year 2 with a 6-month notice to the landlord, they are really only in "debt" for 30 months (24+6), not 60. The rest of the 30 months act more like a "call option" than a debt instrument because the company really doesn't have to pay it. I'm not an accountant and just thinking out loud. And to reiterate, this "optionality" math applies more to office space leases than equipment leases like airplanes.
- deleted 9y ago
  [deleted]
- binarymax 9y ago
  So does this mean we can depreciate things like 3-year AWS reserved instance costs, as they are now counted as assets? Seems pretty nice to me.
  - scott00 9y ago
    Switching from expensing a reserved instance cost to capitalizing and then depreciating it is actually a bad thing. It increases your short term paper profits and decreases your long term paper profits, but doesn't change your pre-tax cash flow. Since you pay taxes on paper profits, it increases short term taxes and decreases long-term taxes, reducing after-tax cash flow in the short term and increasing it in the long term. Since money has time value this reduces the value of your business. In general, if you have the option for tax purposes, it's better to expense something than capitalize and then depreciate it.
- Spooky23 9y ago
  Remember that leases aren’t just leases for real estate. Many companies operationize most or all capital costs. Companies dump all sorts of crap into them. When I used to sell stuff in college, my fortune 50 customers dumped all sorts of stuff into leases like office supplies, etc. My account had me running around buying thousands of pens from stores around us to for one Fortune 50 customer to roll into a lease for a bunch of servers.
  - quickthrower2 9y ago
    When does this cross the line and become fraud?
    - jessaustin 9y ago
      Who would be the victim of fraud in the situation described above? It's my understanding that both the lessor and the lessee know about the office supplies.
      - JumpCrisscross 9y ago
        And the IFRS rules in question came about to ensure investors were similarly informed. Leasing is less capital intensive, more tax efficient and more flexible than owning. Case in point: when I consume a bottle of water from my Uber driver, I am consuming it as part of a lease.
      - dd36 9y ago
        The investor.
    - Spooky23 9y ago
      Usually leases allow for overhead costs to be lumped in to some percentage. If you buy something, you can roll installation services into it. This was just stretching it.
- basicplus2 9y ago
  Unfortunately many leased items are rarely able to produce an income or realise a "sale price" if the original purpose is gone. Thus more often than not, its asset value is almost impossible to reliably be assertained by the business let alone by an external party. For example if all these aeroplanes i have have an income producing capability of producing n $millions but my business can't use them at a profit because of competition, how are the aeroplanes "asset" value ever going to be realised? they are effectively worthless. So the balance sheet should show them at a high figure when business is good, and when business goes down the toilet they should be written off as they can't even be sold.
- georgecarlin 9y ago
  This makes less than zero sense
snowwrestler 9y ago
As an example of how accounting rules can affect investor perception: When Apple started selling the iPhone, they recognized the revenue for each phone over 2 years. They thought they had to do that in order to provide free software updates. Within a couple years the accounting rule changed and Apple could report full revenue from an iPhone sale upfront. Suddenly their GAAP earnings jumped, which led to a stock jump too.
- jonknee 9y ago
  ... They haven't made the change yet: https://www.marketwatch.com/story/apple-changes-tune-on-new-revenue-recognition-rules-2017-07-31 https://www.marketwatch.com/story/apple-changes-tune-on-new-... > “The Company plans to adopt the new revenue standards in its first quarter of 2019 utilizing the full retrospective adoption method,” It won't have much of an impact as the deferred revenue is accounted for and is not the full price of the phone, but the value of future software updates ($25): https://www.sec.gov/Archives/edgar/data/320193/000119312510012091/d10ka.htm https://www.sec.gov/Archives/edgar/data/320193/0001193125100... > For all periods presented, the Company’s estimated selling price for the software upgrade right included with each iPhone and Apple TV sold is $25 and $10, respectively.
Torai 9y ago
Debt is a tool. It can be forgotten or demanded. It's the leverage a few exert upon the world.
- nunez 9y ago
  Not all debt is created equal. If you are opening an airline, you need to buy aircraft (amongst many other things). (Commercial) aircraft are extremely expensive but generate generate value long after they are acquired. It is a lot cheaper to incur devt by leasing those planes than it is to buy them outright. Personal debt is different, in most cases, and is a lot closer to the reality of your statement. I’m spending about $11,000 for our wedding, all inclusive. I paid for that with a credit card. I can’t make revenue off of that wedding outright (though I guess it can become an asset if an epic YouTube video comes out of it and becomes a viral sensation that survives the test of time), so that debt isn’t useful. But I made a risk calculation that me paying for everything upfront and paying for it later is more important than waiting the n years it would take to save for that wedding and pay everything in cash. That decision _could_ bite me in the ass in a few years when IT is 100% automated by ML/AI putting the cloud into the blockchain, but I made that decision assuming that that wouldn’t happen. :-)
redwood 9y ago
How much will this shift the Capex verse Opex dynamic which typically is perceived to be one of the many motivating factors towards cloud computing adoption?
- rrggrr 9y ago
  The cost to own and manage is still greater, but it for terms longer than one year it will likely raise costs to lessees, and will certainly impact their balance sheets.
rrggrr 9y ago
This promises to be a nightmare for small business. By way of a few examples, a company will need to evaluate whether its right to use tangible personal property is actually its own property subject to personal property tax, sales tax and use tax. Generation transfer and businesses sale valuations will be impacted on a perishable lease "asset" values. There will be disputes about the differences between Fair Market Value and GAAP value. Even colocation, SAAS and software leases with terms greater than one year may be impacted by this rule.
- quuquuquu 9y ago
  Any debt a company is reasonably legally required to pay should affect the balance sheet. It would be weird for me to buy a business and then find out theres 3 years of IT spend that weren't reported to me.
cromwellian 9y ago
David Stockton's been pounding this for a long time, he pointed out that Toys R'Us was the first canary to fall. His point is, cheap credit has allowed many unhealthy businesses to keep sputtering along for a long time without making changes. Granted, Stockton is kind of a gold bug, and former Reagan budget director trickle down fan, but he's reformed on the debt issue and taxes now, and has been basically predicting an apocalypse once central banks start cleaning up their balance sheets and tightening interest rates.
- thaumasiotes 9y ago
  > he pointed out that Toys R'Us was the first canary to fall. His point is, cheap credit has allowed many unhealthy businesses to keep sputtering along for a long time without making changes That's an odd point to support with Toys R Us? From what I read, a third party borrowed money to buy the (profitable) Toys R Us. The new, indebted, Toys R Us is still profitable except for the cost of servicing the debt that, notably, it didn't choose to take on. Therefore it's going bankrupt and the buyers are getting wiped out, but the store will be fine because its business is perfectly healthy - revenues exceed cost of operation.
heisenbit 9y ago
This will make debt more attractive for companies that produce something. At the moment the fact that leases are not visible drives productive companies to rent equipment instead of renting money. The big beneficiary were GE Capital and the like that in turn rented the money often at a discount. Leasing companies will continue to enjoy some economies of scale but have lost a strategic advantage. Any effect this rule change will have on companies will show up magnified in the leasing companies.
aisofteng 9y ago
By the same reasoning, wouldn't employee salaries be a contractual liability? Though without committed end dates, usually.
- kgwgk 9y ago
  No, because as you said there is no commitment. Pension plans, however, generate liabilities if underfunded.
runeks 9y ago
In layman’s terms, does this mean that some company a) borrowing money for 10 years to buy machinery, and b) leasing that machinery for the next 10 years, will be reported equally on its balance sheet?
- heos 9y ago
  More or less. Big difference is that 10 years leasing would still be less debt/asset than owning (cars being a prime exampel with leasing usually being for 3 years at a time, obviously a smaller asset/debt than buying the same car).
known 9y ago
https://en.wikipedia.org/wiki/Hollywood_Accounting https://en.wikipedia.org/wiki/Hollywood_Accounting FTW

229 points by gscott 9y ago

If you're accounting for future lease obligations as debt, then I think you somehow have to account for future exclusive use of the thing you are leasing as an asset. It's easy to value the future lease obligation -- monthly payment * remaining term. But without a way to value the corresponding leasehold this change seems like it just distorts financials in a way that makes the data less useful.

kpwagner 9y ago
There is such a thing as a "capital lease", or at least there used to be. Capital leases work in this way--both asset and liability are recorded. It's only fair that the new rules for operating leases works this way too.
fitchjo 9y ago
I would like to caveat by explanation by saying I am admittedly less versed in IFRS than US GAAP, so there may be some technical differences between the two, but the spirit should be the same - there is actually corresponding gross up of your assets, equal to the net present value of your minimum lease payments, when you put the lease obligation on your balance sheet. So at the the time you sign a new lease, you will put an asset and liability of equivalent value on the books. Assuming the useful life of the asset extends past the lease term, general expectation is that the asset value would be amortized over the term of the lease, and at the same time, interest expense will be recorded on the lease obligation. Ultimately the same amount of expense will be recorded (equal to the minimum lease payments), but the timing of the expense is different as it front loads the expense (because of the interest accretion). So you have that and the balance sheet gross up that will be different. The change, in theory, provides greater transparency related to what can be a significant obligation for a company.
- lucas_membrane 9y ago
  > the timing of the expense is different as it front loads the expense (because of the interest accretion) I would expect that if a firm could make a good case to its auditors that the revenue derived from the use of the leased asset was expected to be higher during the early years or lower during the later years, or vice versa, then the auditors would allow a timing adjustment somewhere. If my corporation has just signed a 12-year operating lease for some property in Los Angeles with the intention of profitably obtaining revenue from the property only during the 2028 Olympics, do these accounting rules lock me into such unrealistic reporting? Many years back, I spent quite a bit of time on similar but different issues of recognition of revenue and expense, and it seemed that if one could make a good case, there was flexibility, but everyone wanted to abuse it. Is the flexibility still available in reasonable cases, gone now in general, or gone only for specific classes of contracts like operating leases?
teekert 9y ago
It bothers me that I have Ph.D. yet I understand only about every third word in your comment and nothing of the whole thing.
- narvind 9y ago
  I see what you did there ;)
- johnthomas00 9y ago
  He said if you are going to count the monthly rent against a renter, you have to count the value of the place to live too.
- defen 9y ago
  If I (a company) sign up for a 10 year lease on a retail space, at $10,000 per year, it's easy to see that it's a $100,000 obligation (ignoring things like present value of money etc). Apparently (according to the article; I'm not an expert on this) that $100,000 obligation does not appear on the balance sheet. The new IFRS 16 rule means that it will; so companies will now have a lot more debt. Grandparent commenter was asking "how do you assign a dollar value to the exclusive-use value of that lease" - for example maybe the neighborhood where your shop is suddenly became really popular, so you're locked into a below-market rent for the next 8 years.
  - abritinthebay 9y ago
    It's an interesting objection but I don't see why you'd have to assign a dollar value to it. Yes you might be overall doing well compared to other possible options but that doesn't change that you're still owing $100k. Perhaps I'm not understanding the objection but it seems like an unfounded one.
    - toast0 9y ago
      You owe $100k, but you also have something of value (worth approximately $100k when the lease was entered, but should be adjusted for transaction costs of subleasing). Over time, your payments reduce the debt (this balances out), but the asset also reduces value, which reduces your overall balance. Adjustments for marketability of the leased property should also be made. If the property isn't marketable, maybe the current asset value is $0, but that's rarely the case.
sologoub 9y ago
That seems to be what it's already requiring: "Under IFRS 16, a lessee is required to recognize an asset for the right to use the leased item and a liability for the present value of its future lease payments." https://en.m.wikipedia.org/wiki/IFRS_16 https://en.m.wikipedia.org/wiki/IFRS_16
- jasode 9y ago
  At meta level, it would be interesting to know why IFRS chose the philosophical position that the lease remaining unpaid term is a "debt". It seems like another valid way to look at the lease (for renting space) is to consider it a "call option" on a agreed upon price with an expiration date. Therefore, you don't count the whole lease as a bank-like debt but instead, count the "lease termination" fee. (Or maybe I'm taking the examples discussed in HN too literally and the actual IFRS text already covers both situations and the company can choose to record "remaining term" or "termination fee" -- whichever is the lower amount. The termination fees for equipment like airplanes and tractors is higher percentage (must pay remaining residual value) than office space which makes it behave more like a "loan".)
  - vpribish 9y ago
    if there's a way out of paying it other than default that's an interesting notion. option-pricing models are a bit more complex than accounting seems to like though. seems like an opportunity for a data-vendor or hedge fund: option pricing of leases for improved valuation models. hmm...
  - jeffdavis 9y ago
    For accounting you probably want to keep it simple. Accounting should be a baseline sanity check to keep numbers somewhat in line with reality. It's not meant as a valuation model.
    - jasode 9y ago
      >It's not meant as a valuation model. That's not my intention. I'm staying within the bounds of plain accounting for the concept of "debt liability". If a company has a 5 year lease of $1000/month rent, I think the new accounting rules says it's a 60x$1000=$60000 "debt". But in my mind, the company really isn't on the hook for all $60k. If the company has an "early termination" or "lease buyout" clause that they can exercise at year 2 with a 6-month notice to the landlord, they are really only in "debt" for 30 months (24+6), not 60. The rest of the 30 months act more like a "call option" than a debt instrument because the company really doesn't have to pay it. I'm not an accountant and just thinking out loud. And to reiterate, this "optionality" math applies more to office space leases than equipment leases like airplanes.
deleted 9y ago
[deleted]
binarymax 9y ago
So does this mean we can depreciate things like 3-year AWS reserved instance costs, as they are now counted as assets? Seems pretty nice to me.
- scott00 9y ago
  Switching from expensing a reserved instance cost to capitalizing and then depreciating it is actually a bad thing. It increases your short term paper profits and decreases your long term paper profits, but doesn't change your pre-tax cash flow. Since you pay taxes on paper profits, it increases short term taxes and decreases long-term taxes, reducing after-tax cash flow in the short term and increasing it in the long term. Since money has time value this reduces the value of your business. In general, if you have the option for tax purposes, it's better to expense something than capitalize and then depreciate it.
Spooky23 9y ago
Remember that leases aren’t just leases for real estate. Many companies operationize most or all capital costs. Companies dump all sorts of crap into them. When I used to sell stuff in college, my fortune 50 customers dumped all sorts of stuff into leases like office supplies, etc. My account had me running around buying thousands of pens from stores around us to for one Fortune 50 customer to roll into a lease for a bunch of servers.
- quickthrower2 9y ago
  When does this cross the line and become fraud?
  - jessaustin 9y ago
    Who would be the victim of fraud in the situation described above? It's my understanding that both the lessor and the lessee know about the office supplies.
    - JumpCrisscross 9y ago
      And the IFRS rules in question came about to ensure investors were similarly informed. Leasing is less capital intensive, more tax efficient and more flexible than owning. Case in point: when I consume a bottle of water from my Uber driver, I am consuming it as part of a lease.
    - dd36 9y ago
      The investor.
  - Spooky23 9y ago
    Usually leases allow for overhead costs to be lumped in to some percentage. If you buy something, you can roll installation services into it. This was just stretching it.
basicplus2 9y ago
Unfortunately many leased items are rarely able to produce an income or realise a "sale price" if the original purpose is gone. Thus more often than not, its asset value is almost impossible to reliably be assertained by the business let alone by an external party. For example if all these aeroplanes i have have an income producing capability of producing n $millions but my business can't use them at a profit because of competition, how are the aeroplanes "asset" value ever going to be realised? they are effectively worthless. So the balance sheet should show them at a high figure when business is good, and when business goes down the toilet they should be written off as they can't even be sold.
georgecarlin 9y ago
This makes less than zero sense

snowwrestler 9y ago

As an example of how accounting rules can affect investor perception: When Apple started selling the iPhone, they recognized the revenue for each phone over 2 years. They thought they had to do that in order to provide free software updates. Within a couple years the accounting rule changed and Apple could report full revenue from an iPhone sale upfront. Suddenly their GAAP earnings jumped, which led to a stock jump too.

jonknee 9y ago
... They haven't made the change yet: https://www.marketwatch.com/story/apple-changes-tune-on-new-revenue-recognition-rules-2017-07-31 https://www.marketwatch.com/story/apple-changes-tune-on-new-... > “The Company plans to adopt the new revenue standards in its first quarter of 2019 utilizing the full retrospective adoption method,” It won't have much of an impact as the deferred revenue is accounted for and is not the full price of the phone, but the value of future software updates ($25): https://www.sec.gov/Archives/edgar/data/320193/000119312510012091/d10ka.htm https://www.sec.gov/Archives/edgar/data/320193/0001193125100... > For all periods presented, the Company’s estimated selling price for the software upgrade right included with each iPhone and Apple TV sold is $25 and $10, respectively.

Torai 9y ago

Debt is a tool. It can be forgotten or demanded. It's the leverage a few exert upon the world.

nunez 9y ago
Not all debt is created equal. If you are opening an airline, you need to buy aircraft (amongst many other things). (Commercial) aircraft are extremely expensive but generate generate value long after they are acquired. It is a lot cheaper to incur devt by leasing those planes than it is to buy them outright. Personal debt is different, in most cases, and is a lot closer to the reality of your statement. I’m spending about $11,000 for our wedding, all inclusive. I paid for that with a credit card. I can’t make revenue off of that wedding outright (though I guess it can become an asset if an epic YouTube video comes out of it and becomes a viral sensation that survives the test of time), so that debt isn’t useful. But I made a risk calculation that me paying for everything upfront and paying for it later is more important than waiting the n years it would take to save for that wedding and pay everything in cash. That decision _could_ bite me in the ass in a few years when IT is 100% automated by ML/AI putting the cloud into the blockchain, but I made that decision assuming that that wouldn’t happen. :-)

redwood 9y ago

How much will this shift the Capex verse Opex dynamic which typically is perceived to be one of the many motivating factors towards cloud computing adoption?

rrggrr 9y ago
The cost to own and manage is still greater, but it for terms longer than one year it will likely raise costs to lessees, and will certainly impact their balance sheets.

rrggrr 9y ago

This promises to be a nightmare for small business. By way of a few examples, a company will need to evaluate whether its right to use tangible personal property is actually its own property subject to personal property tax, sales tax and use tax. Generation transfer and businesses sale valuations will be impacted on a perishable lease "asset" values. There will be disputes about the differences between Fair Market Value and GAAP value. Even colocation, SAAS and software leases with terms greater than one year may be impacted by this rule.

quuquuquu 9y ago
Any debt a company is reasonably legally required to pay should affect the balance sheet. It would be weird for me to buy a business and then find out theres 3 years of IT spend that weren't reported to me.

cromwellian 9y ago

David Stockton's been pounding this for a long time, he pointed out that Toys R'Us was the first canary to fall. His point is, cheap credit has allowed many unhealthy businesses to keep sputtering along for a long time without making changes. Granted, Stockton is kind of a gold bug, and former Reagan budget director trickle down fan, but he's reformed on the debt issue and taxes now, and has been basically predicting an apocalypse once central banks start cleaning up their balance sheets and tightening interest rates.

thaumasiotes 9y ago
> he pointed out that Toys R'Us was the first canary to fall. His point is, cheap credit has allowed many unhealthy businesses to keep sputtering along for a long time without making changes That's an odd point to support with Toys R Us? From what I read, a third party borrowed money to buy the (profitable) Toys R Us. The new, indebted, Toys R Us is still profitable except for the cost of servicing the debt that, notably, it didn't choose to take on. Therefore it's going bankrupt and the buyers are getting wiped out, but the store will be fine because its business is perfectly healthy - revenues exceed cost of operation.

heisenbit 9y ago

This will make debt more attractive for companies that produce something. At the moment the fact that leases are not visible drives productive companies to rent equipment instead of renting money. The big beneficiary were GE Capital and the like that in turn rented the money often at a discount. Leasing companies will continue to enjoy some economies of scale but have lost a strategic advantage. Any effect this rule change will have on companies will show up magnified in the leasing companies.

aisofteng 9y ago

By the same reasoning, wouldn't employee salaries be a contractual liability? Though without committed end dates, usually.

kgwgk 9y ago
No, because as you said there is no commitment. Pension plans, however, generate liabilities if underfunded.

runeks 9y ago

In layman’s terms, does this mean that some company a) borrowing money for 10 years to buy machinery, and b) leasing that machinery for the next 10 years, will be reported equally on its balance sheet?

heos 9y ago
More or less. Big difference is that 10 years leasing would still be less debt/asset than owning (cars being a prime exampel with leasing usually being for 3 years at a time, obviously a smaller asset/debt than buying the same car).

known 9y ago

https://en.wikipedia.org/wiki/Hollywood_Accounting https://en.wikipedia.org/wiki/Hollywood_Accounting FTW