Accounting changes cast pall over recession-hit UK plc

LONDON (Reuters) - Britain's elite companies may find it tougher to source capital from 2013 when new rules on accounting leases are set to come into force, swelling their balance sheet liabilities by many billions of pounds.

The International Accounting Standards Board IASB.L has published proposals to treat leases as liabilities and the corresponding 'right of use' as an asset, triggering a countdown to one of the most sweeping accounting changes in years.

The organisation has invited comments from companies on how these assets might be revalued over the course of the lease.

Together with U.S. counterpart the Financial Accounting Standards Board, the IASB is pursuing the reforms to improve corporate transparency on contractual obligations on leased assets like real estate, aircraft and manufacturing machinery.

"Much of the estimated annual $640 billion of lease commitments fails to appear on the balance sheet of lessees, thereby giving a false impression of companies' liabilities and gearing," said IASB Chairman Sir David Tweedie.

Some experts fear the resulting spike in balance sheet liabilities could distort corporate performance indicators as they battle back from recession, potentially impairing the ability of some companies to raise debt or equity.

"The result could be lower asset turnover ratios, lower return on capital and an increase in debt-to-equity ratios which could impact borrowing capacity or loan covenant compliance," said Veronica Poole, head of Deloitte's Global IFRS Leadership Team, which estimates total lease liabilities of Britain's top 50 companies at 94 billion pounds.

"It would also typically raise the EBITDA (earnings before interest, taxes, depreciation and amortisation) figure beloved by analysts," she added.

IMPACT ON LANDLORDS

The proposed changes could spell trouble for companies in Britain's quoted real estate sector, which may see their business models undermined as tenants reconsider the value of owning rather than renting real estate.

"If you must show the asset and its matching liability in the balance sheet, there may be an argument that you may as well own the real asset. That way you have opportunity to benefit from a share in the cyclical upside in value," Jeremy Day, head of corporate real estate at King Sturge, said.

Market experts say large occupiers such as Tesco (TSCO.L), J Sainsbury (SBRY.L), Barclays (BARC.L), Lloyds Banking Group (LLOY.L) and Royal Bank of Scotland (RBS.L) will demand shorter lease lengths and more break clauses in rental contracts to secure more flexibility at the expense of landlords.

The likely changes will further darken an already gloomy outlook for tax-efficient real estate investment trusts such as Land Securities (LAND.L), British Land (BLND.L) and Hammerson (HMSO.L), which may need to review dividend policy as rental income streams become less stable.

The final standard is expected to be introduced in 2011, although implementation is unlikely before January 1, 2013, Stanley Booton, chairman of the Royal Institution of Chartered Surveyors Valuation for Financial Statements Group, said.

"We are still waiting for guidance on how these assets and liabilities will be valued on the balance sheet going forward. The U.S. is less used to revaluation as a concept and there have been differences between the IASB and FASB on this issue."

"Progress all depends on whether these differences can be ironed out," he said.

Whether 2013 or later, Day said UK companies had much work to do to prepare themselves and their investors for the impact.

"Surprisingly, few corporates have clear visibility of their real estate. If this does get through in its current guise, there will need to be an almighty scurrying around to get old leases out and calculate liabilities," he said.

"There's an enormous workload and cost implication in the implementation of these changes. Companies will now need to look at their property annually, whereas up to now many will only have considered their real estate when there's a problem."

(Editing by Andrew Macdonald)