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Plan Ahead for Accounting Changes

Client Alert - January 5, 2012

By Lonny Cades

The Financial Accounting Standard Board (“FASB”) is the organization which establishes financial accounting and reporting standards in the United States. Its counterpart in most other countries is the International Accounting Standards Board (“IASB”). FASB and IASB are in the process of discussing new standards for accounting for lease transactions. If adopted, these standards will effect not only lessors and lessees but will also have impact on accountants, attorneys, employees (especially highly compensated employees) and borrowers.

The proposed new standards are presently in draft form and are subject to comments and revisions. It is not expected that the final new standards will differ to any significant extent. Presently, the revisions will apply to real estate and equipment leases. The inclusion of inventory and other items are being considered. The proposed revised standards do not include mineral, gas and oil leases and it is not anticipated that these will be included in the final adopted new standards.

If adopted, the new standards will revise the definition of GAAP, which is Generally Accepted Accounting Principals. The adherence to GAAP is found in virtually all loan documents. GAAP is relied upon to, including, but not limited to, calculation of employee bonuses, purchase prices for businesses, payouts and Earnings Before Interest, Taxes, Depreciation and Amortization. (“EBITDA”).

The proposed new standards would also effect decisions as to whether to buy or lease. They could also affect debt to equity ratios and result in default of loan covenants and the underlying loans. Borrowers should be cognizant of the potential effect on loan covenants and may want to attempt to renegotiate these covenants with their lenders.

FASB is aiming to have the new standards in place by 2013 but it is likely that the date will be later. However, since the new standards will effect decisions being made now in regard to the information above, it is important to plan for them now.