From the course: Accounting Foundations: Leases

The importance of lease accounting

From the course: Accounting Foundations: Leases

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The importance of lease accounting

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- From 1976 until 2018, the accounting for leases was among the most deceptive accounting practices in existence. - Deceptive, yes, deceptive. In 2016 alone, lease accounting standards allowed publicly traded companies around the world to avoid reporting three trillion dollars in obligations under noncancelable lease contracts. - Wait, wait, did you mean three billion? - Three trillion dollars. Historically, the flexibility of the accounting standards relating to leases has resulted in a phenomenon called off-balance sheet financing. Now, the phrase itself sounds pretty unsavory, off-balance sheet financing, I mean, the very purpose of the balance sheet is to report the sources of a company's financing, right? - That is right. So in 2019, better rules were implemented, and the changes to the financial statements have been dramatic. - Hi, I'm Jim Stice, I'm a Professor of Accounting at Brigham Young University. This is my brother, Kay. - I'm also a Professor of Accounting at Brigham Young University. - Come, join us on LinkedIn Learning, and we will show you how an accounting rule change implemented in 2019 has gone a long way toward eliminating lease accounting as a tool for off-balance sheet financing.

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