Monday, January 24, 2011

Executory Contracts: The Root of Most Off-Balance-Sheet-Financing Evils

Via The Accounting Onion.
Unlike many other topics I have been writing about where the points of contention are approaches to measurement matters, the heart of this matter seems to involve recognition, and most particularly recognition of 'executory contracts'.
Every accountant has been raised to observe two sacred and inviolable commandments: thou shalt not recognize executory contracts on the balance sheet; and thou shalt present on a 'net' basis receivables/payables with the same counterparty.
While these commandments were once inviolable, leases have become a very notable exception. First came SFAS 13 in 1976, requiring that a very limited number of executory contracts meeting the definition of a 'capital lease' would be grossed up to reflect a leased asset and a corresponding liability. Then, recently, the FASB has finally, finally come to timidly propose that failure to capitalize any lease contract unacceptably distorts financial statements. Even armed with an understanding of the political realities that the FASB operates under, it is hard not to be shocked and awed by the resistance to this simple idea from issuers and the leasing industry en masse.
Click Here to Read: Executory Contracts: The Root of Most Off-Balance-Sheet-Financing Evils 

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