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Opinion

Why FASB Should Hit Pause

By Baruch Lev and Shiva Rajgopal

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Of the estimated 150 standards issued from FASB’s inception in 1973 through 2009, 75 percent had zero effect on the shares of the impacted companies.

Earlier this year, the Financial Accounting Standards Board voted to require companies to add to their balance sheet most of the leases they use. This rule, one among hundreds, could swell balance sheets by as much as $2 trillion and make companies, such as airlines that lease planes and retail or restaurant chains that lease real estate, look far more leveraged than they do now. 

The new rule capitalizes leases on the balance sheet, when current footnote disclosure on future lease payments provides essentially the same information. According to FASB, putting leases on the balance sheet is expected to make it easier for the average investor to see the effect they have on a company’s finances.  But is that really true? 

We recently conducted a comprehensive study of almost all the standards issued by FASB. The results were surprising. Of the estimated 150 standards issued from FASB’s inception in 1973 through 2009, 75 percent had zero effect on the shares of the impacted companies. What’s more, 13 percent of the standards actually detracted from shareholder value and only 12 percent of the standards improved investors’ lot. 

Read the full article as published in Accounting Today.

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Baruch Lev is the Philip Bardes Professor of Accounting and Finance.