International standards threaten airline profits
The already beleaguered aviation industry is facing a fresh blow from moves by the global body charged with setting accounting rules to crack down on lease accounting.
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A rule change will transform the face of many companies’ balance sheets, potentially knocking millions off profits. A shake-up in accounting for leases will see operating leases – currently off balance sheet – treated in the same way as finance leases.
Despite an expected backlash from the leasing industry, Sir David Tweedie, chairman of the International Accounting Standards Board, is determined to issue a revised rule soon.
Tweedie said: ‘Everyone is up in arms about Enron but the problem is the accounting. We need to change accounting. Aeroplanes are not on the balance sheet. Billions of pounds of liabilities are off-balance sheet. We will be dealing with leasing soon.’
The UK’s Accounting Standards Board is to submit its research on leases to the IASB before the year end. The IASB will then draft a discussion paper in the lead up to a new rule.
Critics of the plans include the Finance and Leasing Association and the British Vehicle Rental and Leasing Association, which claim ‘abstract theory’ is not enough. The IASB’s move – which will be widely perceived as improving transparency – is expected to receive broad support. Off-balance sheet transactions were at the root of Enron’s collapse.
Allan Cook, ASB technical director, said: ‘The finance lease approach ought to apply to all leases. We will be inundated with people saying we mustn’t change it, but there are strong reasons for it. And we will see more realistic figures on the balance sheet.’
The world’s airlines are already facing losses totalling $5bn (£3.2bn) on international flights this year, the International Air Transport Association warned at its annual conference.
