News on 20 November 2000
Corporate PFI may be the only form of "off-balance
sheet" financing available in the future. This was one of the messages
from a presentation by Peter Vernon of PricewaterhouseCoopers to the UK
Chapter of Nacore last week.
Vernon described the changes to lease accounting proposed by the Accounting
Standards Board. Currently leases are classified as either finance or
operating leases. If the net present value of the minimum lease payments
is greater than 90% of the value of the asset, then it’s a finance
lease (ie a form of borrowing), if not then it’s an operating lease.
The ASB proposals would effectively remove the distinction, all leases
would be treated the same, as assets that needed to be financed and which
should therefore be on the balance sheet.
 |
| Peter Vernon speaking at last week's Nacore meeting |
The changes will not change business fundamentals but are
aimed at ensuring that financial statements represent ‘economic reality.’
Arguably, to distinguish a finance from an operating lease is a distortion
of economic reality. The key point, argues, Vernon is that the ASB’s
proposals will put new information in the public domain: "They will
show how corporations are constrained by long and/or inflexible leases
which are difficult and expensive to get out of."
Two companies adopting different property strategies, one predominantly
lease based the other freehold, would have very different balance sheets.
New information will lead to a sharper focus on property financing decisions
– Why is a company financing property the way it is? Has it got the
balance right?
Under the proposals longer leases would have a larger impact on the P&L,
particularly in the early years. Vernon suggested that the changes might
accelerate demand for shorter leases as well as leading to an increase
in freehold ownership and outsourcing. "Occupiers should be arguing
for more flexible leases and be prepared to pay for them. Short-term leases
have been elusive because neither landlords or tenants are placing a proper
value on them. From an occupier’s perspective, one strategy might
to be to minimise the net present cost of property, taking account of
uncertain future requirements."
The proposals could be enacted within two to three years, so Peter Vernon’s
answer is to think about this issue now.
www.asb.org.uk
www.nacore.org.uk
