Leases on Balance Sheets

Leasing transfers effective ownership of physical assets to specialists. Firms not specializing in asset ownership focus on core competence and scale. In asset ownership including real estate, specialists have low or zero corporate tax rates and use depreciation to shield dividends. With operating leases, non-specialist firms operate the assets with no entry on balance sheets. On income statements, non-specialists deduct rent as an expense. On specialist income statements, the rent is exempt from double taxation of distributed dividends. Accounting reform proposes to undo and upend these arbitrage provisions. All leases have capitalized present values and are reflected as right-to-use assets and liabilities on balance sheets, expensed straight line. Reported liabilities rise, potentially undermining debt covenants. Sale and leaseback provisions are at risk of being reversed, notably if proceeds have been already distributed.