Airline debt balances could come under strain due to a revised exposure draft (ED) on lease accounting released last month by the International Accounting Standards Board and the US Financial Accounting Standards Board, according to a KPMG research report.
"The top 20 global airlines could see an additional $100 billion added to their balances sheets under the proposals that would bring most leases on-balance sheet for lessees," says KPMG in Leases: Final approach or go-around?.
The firm identifies a number of issues likely to impact airlines and aviation financiers due to the ED, which was released on 16 May 2013.
A 120-day comment period now follows the ED. The IASB and FASB have indicated that they will perform extensive outreach during the comment period, says KPMG.
"Capitalising these leases would significantly change the balance sheets of many airlines," says KPMG. "The proposed guidance would also significantly change the income statement profile for many leases, accelerating expense recognition compared to current operating lease treatment."
The ED aims to respond to long-standing criticism that lease accounting has been "too permissive" of off-balance sheet treatment by lessees, according to KPMG. However, KPMG research indicates many industry observers feel that the ED is "overly complex" and dominated by "arbitrary" rules.