Accounting for leases: telling it how it is

Purpose - The purpose of this paper is to express a viewpoint in respect of proposed changes to accounting for leases. It aims to present a summary of accounting principles and behaviours in the property leasing markets. Design/methodology/approach - The paper reflects analysis by the author conducted as part of an MBA project (which, in its entirety, dealt with the lease versus own decision) and is summarised as follows: in the definitions of SSAP 21, a lease is “a contract between a lessor and a lessee … ” and a distinction is drawn between an operating lease and a finance lease. The almost arbitrary treatment of leases has never been satisfactory but dealing with the shortcomings has proven awkward to the International Accounting Standards Board (IASB). Findings - The value of reflecting leases on the balance sheet can be determined by close analysis of the work of Lasfer and other proponents of the advice that leasing real estate is better than owning it. The purpose of financial reporting is to show an accurate picture of the trading and health of the business in question. If significant parts of the picture are missing, perhaps it is not surprising that markets struggle to comprehend the true nature of assets and liabilities. Leasing is an activity whereby the use of an asset is separated from the ownership of that asset. The Accounting Standards Board, in its Statement of Principle, defines assets as “rights or other access to future economic benefits controlled by an entity as a result of past transactions or events”. Liabilities are defined as “obligations to transfer benefits as a result of past transactions or events”. Ownership of property would appear to fall into the category of asset; any borrowings against that asset would be categorised as a liability. A lease would appear to fall into both liability and asset categories. Originality/value - It may not be comfortable for occupiers to adjust to the new accounting regime. It is, in the author's judgement, in the best interests of all stakeholders and, since it will require more active management, of the business itself.