Chief financial officers are changing their views on how they assess corporate performance in light of changes to lease accounting rules coming into play.
Reports in The Wall Street Journal said CFOs are changing the way they benchmark company performance, with potential implications for investors that continue to rely on traditional metrics to assess the state of a company.
The publication reported Thursday (May 2) that the International Financial Reporting Standards will apply to organizations across 140 countries, shifting the way businesses account for their leases in financial statements. Companies including Orange, Deutsche Telekom and Air France have already notified investors that they are amending or changing performance metrics.
Certain lease payments must be documented as depreciation and interest charges, not operating expenses, and it’s changing the metrics used by CFOs to assess company performance. The publication said it will lead to higher earnings before interest, taxes, depreciation and amortization for some businesses, while other financial metrics may appear weaker in some scenarios.
The International Accounting Standards Board established the new lease accounting rules because previous lease accounting practices limited investor and analyst visibility into company finances without leases included on the balance sheet, reports explained.
“There are a lot of adjustments to financial metrics already, and the more we have, the more difficult it will be to assess the underlying performance of the business,” said U.K. Individual Shareholders Society Director Mark Bentley in an interview with the publication.
“Every company that adopts the new standard will get a boost in reported free cash flows arising from the re-categorization of operating lease payments,” said Moody’s Investors Service Vice President Trevor Piper in another statement. “Investors could then ask, ‘What are you doing with all this free cash?'”
Analysts have previously warned that the lease accounting standard changes could also impact corporate lending, with the changes impacting firms’ debt-to-earnings ratios that could limit borrowing powers among companies, earlier WSJ reports said.