Summary:
The Financial Accounting Standards Board, which sets American accounting guidelines, has been working with International Accounting Standards Board to combine its generally accepted accounting principles with international standards. The Financial Accounting Standards Board and the International Accounting Standards Board have come up with a new accounting standard that is planned to be finished next year and will be in effect in 2013. The new standard requires companies to book leases as assets and liabilities on the business balance sheets. Now, companies have to put around $1.3 trillion in leases of assets and liabilities on their balance sheets. In the year 2013, all companies will record much higher rent as part of their liabilities on their balance sheets. They’re balance sheets are going to be a huge liability that makes it looks ugly. This could have a serious impact on weakening companies because with such a huge liability on their balance sheets, other investors will become uninterested working with those companies. Commercial banks will be struck in 2013, especially if they are still recovering from the recent recession. Many companies are strategizing of how to counteract this standard. Many companies are buying out their offices and property in order to avoid the problem of recording leases on their balance sheets. Some companies may shrink the number of years on their lease because this will decrease the size of the liability so the balance sheets won’t give the companies a poor reputation. Some industries decided to sign contingent rents instead of signing leases. The costs of contingent rent depend on the percentage of the sales of the company. This method also helps the company avoid the problem of recording leases on balance sheets. Starting in 2013 companies will have to deal with the problem of having to record rent as a major liability but this debt will reduce over the terms of the lease.
Connection:
This article is connected to the concepts of which organizations are responsible for the development of accounting standards. In chapter 1, it discusses that Canadian accounting standards are being converged into international accounting standards in January 2006. In this article it reports that the Financial Accounting Standards Board, the organization who sets accounting standards for American corporations have decided to merge its accounting standards with the International Accounting Standards Board at the end of this year. The two boards combined to come up with a new standard, which requires all companies in the United States to record leases on their business balance sheets. Balance sheet brings up another connection with chapter 1. Balance sheets are heavily effected in this article because companies are required to record their rent expense as a major liability instead of treated as an expense in the income statement and they will record their right to use the land as an asset. This will affect the reputation of the business balance sheet because leases are huge liabilities that will be recorded on the balance sheet. Other companies who may want to work with this company but they see that this company has a large amount of liabilities and this factor may affect their decision of working with that company or not. Companies may want to borrow some money from the bank, for expanding their business. Banks will look at the companies’ balance sheets and they will see a huge liability on the balance sheet. Banks may decide not to lend any money to business after seeing their huge amount of liabilities on the balance sheets. This new accounting standard will have a huge impact on future companies in Canada United States
Reflection:
In my opinion, I think this is an unfair accounting standard for the companies because many companies will end up having to pay higher rent than usual, especially since the United States have not completely recovered from the recent worldwide economic downfall. I think this new accounting standard may ruin the reputation of many businesses in the United States
