A new rule in the corporate accounting world is estimated to pull about $3 trillion from the dark. Companies have been asked to record the cost of asset renting, effective from this year. These expenses would include equipments, office rent, car and plane fare etc, which would be reflected in the balance sheet, unearthing trillions of unaccounted expenses.
Due to this new addition to the accounting standards these expenses will now be added to the existing liabilities. Only the expenses of leasing an asset before occupying it, was recorded in this manner before. According to the accounting board, this would make the estimation of a company’s standing easier for its investors. Partner at PricewaterhouseCoopers, Sheri Wyatt says that this would affect the leverage of all the companies as the liabilities would be higher that what they were.
According to Morgan Stanley, the sector at consumer’s discretion would be most affected due to this increase in debt, while the leverage ratio in the retail is expected to rise to 3.4 times from 1.2 times earlier. The public companies in the US have about $3 trillion as operating lease. These primarily include the airline sector, the retail sector and the automobile sector. This is also expected to force the investors to change the ways in while they measure the financial soundness of an organization. The debt equity ratio is an important analysis for an investor before he embarks upon his investment plans. While calculating the debt equity ratio, the analysts and investors did not completely ignore the impact of the operating leases. For a very long time the leases were capitalized by multiplying annual rent with 8 to derive an approximation of the remaining payments due. Depending on the numbers there will soon be an exponential impact on the metrics due to this rule.