While it’s been nearly 9 years since Enron Corporation filed for bankruptcy, the former energy giant’s financial shenanigans still are reverberating. Specifically, financial regulators and standards-setters are continuing their efforts to move off-balance-sheet partnerships and arrangements onto companies’ financial statements. Enron, if you recall, had several thousand off-balance-sheet affiliates with a cumulative $40 billion in debt, according to this report by The Financial Times.

One result of the desire for greater transparency: the proposed changes in lease accounting standards expected to be issued by the FASB in June, which will require all leases to appear on companies’ financial statements. “The movement to put all obligations on the balance sheet is a sign of the tail end of the Enron era,” says Mindy Berman, managing director with real estate firm Jones Lang LaSalle, Chicago.

Why should treasurers care about what is basically an accounting change? The potential impact to companies’ P&L and balance-sheet statements could hinder some firms’ ability to comply with loan covenants.

The changes expected to come in June follow a discussion paper, “Leases: Preliminary Views,” that the FASB and IASB (International Accounting Standards Board) presented in March of last year. In a release accompanying the paper, the organizations point out that total annual leasing volume in 2007 hit $760 billion, yet few of the contracts appeared on any organization’s balance sheets. In the view of the IASB and FASB, “lease accounting should be based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognized in an entity’s statement of financial position.”

Today, leases can be divided into two categories – operating or capital leases. In the U.S., only capital leases are recognized in the financial statements. The distinction between capital and operating leases likely will no longer exist under the proposed standards, and all leases will need to appear on the financial statements, according to Jones Lang LaSalle.

In fact, it’s possible that not only will organizations have to include all monthly lease expenses within their financial statements, but they’ll also have to recognize a greater portion of the rent expense up front. That’s because rather than accounting for the lease expense evenly throughout its term, organizations will need to amortize the capitalized value of the leased asset and recognize a greater portion of the expense at the outset.

In addition, under the proposals, the capitalized value will include not only base rent, but an estimate of contingent rent and other expected payments. As if that weren’t enough, the lease term will need to include all optional renewal terms, according to Jones Lang LaSalle.

On a 10-year lease, which is the average term for retailers, the first-year lease expense will jump about 20 percent from where it currently is, Berman notes.

While it’s hard to argue against the reasons for moving off-balance-sheet financing arrangements onto companies’ financial statements, the proposals (should they proceed) will make accounting for leases much more complex. Because every company will have to estimate its potential future lease expenses, the resulting financial statements are likely to vary greatly from one firm to another.

To be sure, most of the impact of these changes will be felt in accounting. However, treasurers are unlikely to escape entirely unscathed. The accounting changes would put larger amounts of debt on companies’ balance sheets, Berman says. An organization’s banking partners could view the new numbers as an indication that the firm has increased its financial leverage. The upshot? Companies could end up in technical violation of their loan covenants because of the accounting changes.

At this point, the proposals are just that: proposals. However, it makes sense to prepare for the changes that are likely to come. As a start, you’ll want to keep tabs on the discussion. In addition, you’ll need to review current loan agreements and lease arrangements, to see what impact the proposed changes could have on each. That probably will mean working with your colleagues in real estate, IT, and equipment leasing, as well as the business units. “Evaluate the impact on borrowing and financial covenants,” Berman says.

You’ll also want to make sure that any new loan agreements your firm enters into contain the flexibility it may need to comply with the possible regulations. You don’t want to find that your bank is using a technical violation of the agreement to either call the loan or boost its pricing. ###