More than 52% of South Africa executives are unaware of pending accounting changes that will affect the reporting of leases and markedly alter balance sheets, thereby impacting debt-to-equity and return-on-investment ratios, says a recent report by Grant Thornton.

The 2013 International Business Report (IBR) surveyed 3 450 businesses across 44 economies regarding the proposed new lease accounting standard set to come into effect in 2014.

The new standard, which was currently in draft format, was expected to require that companies reporting under International Financial Reporting Standards would now need to record billions of rands of new assets and liabilities.

Grant Thornton Johannesburg assurance head David Reuben noted that the proposed amendments would have far-reaching consequences for a large proportion of local businesses, particularly in the aviation, manufacturing, mining or retail sectors, which commonly held many equipment and property leases.

“This new standard from the International Accounting Standards Board and the Financial Accounting Services Board will require that all leases, other than short-term leases, will have to be reported on the balance sheet,” he said. 

“This has the effect of broadening the definition and perceptions of what an asset and liability is.”

At the end of 2012, the US Securities and Exchange Commission estimated that the “undiscounted value of future lease payments among US-listed companies alone was more than $1.35-trillion”.

At this stage, Reuben said it would be difficult to estimate a similar value for South African companies, as the impact on their balance sheets would still need to be calculated.

According to the IBR report, the average business held 20 leases, with the highest noted in Sweden, at 68 leases a business, followed by Japan, with 49 leases a business, Finland, with 39 leases a business, and Australia, which held an average of 25 leases a business.  

In South Africa, Grant Thornton’s research indicated that nearly 85% of local businesses surveyed currently held leases, with 51% holding less than five leases and 15% reported to hold more than ten leases in their businesses.

Reuben expressed concern about the lack of awareness amongst local businesspersons surveyed, with 52% of those polled unaware of the upcoming amendments.

“It is encouraging to note, though, that local executives seem to be marginally more aware of the pending lease accounting amendments than their global and Brazil, Russia, India and China, or Bric, counterparts,” said Reuben. 

The IBR survey revealed that 47% of South African executives were aware of the upcoming changes, compared to 42% globally, and just 21% in the Bric grouping.

Awareness was greatest in the US, with 75%, followed by India at 70%, Chile at 60% and the UK, with 56%.

In terms of what impact these changes would have on businesses, 34% of South African executives believed that the amendments would increase transparency for investors, while 28% were expecting the new standard to increase the cost and complexity of reporting. 

Grant Thornton International CEO Ed Nusbaum said the current lack of transparency around operating leases needed to be dealt with and, in light of this, he welcomed the pending lease accounting amendments.

“The information in the financial statements currently does not provide complete, readily understandable information about the obligations associated with operating leases,” he commented.

“But change for the sake of change is not the goal. A new standard that is not based on clear, consistent principles could actually make things worse.”

The leasing project began with an exposure draft published in 2010.

Once the draft is issued by June, it would be put out for public comment for a period of 120 days.

The revised standard would be then be issued in 2014.