Sherman wrote to the FASB and IASB in October to express his misgivings about their latest proposed standard for lease accounting. REIT.com spoke with him about his concerns and recommendations on how the boards should proceed in establishing the new accounting standard.
REIT.com: FASB says the objective of its leases proposal is to provide a more accurate representation of leasing transactions by requiring lessees to recognize assets and liabilities arising from operating leases. Do you have an objection to that project in and of itself?
Sherman: The project is fine as long as it leads to footnote disclosure of lease obligations and leasehold rights. Leaseholds are not assets. Leaseholds are executory contracts. We’ve got centuries of our profession that have reached that conclusion, and there’s no reason to throw away centuries of understanding of leases.
REIT.com: Do you feel that current financial standards accurately portray leasing transactions?
Sherman: I’m for more footnote disclosure, but, basically, yes. I want to stress that we should see more disclosure in footnotes because that is important data for investors to see in the footnotes.
Investors’ most valuable stock-in-trade is their ability to read financial statements, read the disclosures, read the other information and come to their own conclusions as to the value of the company’s assets.
REIT.com: In a letter that you sent to the FASB and IASB earlier this month, you noted your belief that implementing the new accounting treatment for leases would harm the U.S. economy. Can you give us an idea of how you envision that happening and how you think the new standard could distort economic behavior?
Sherman: The studies cited in my letter do an excellent job of that, plus there’s more.
The short-term effect—and you can’t solve this with transition rules unless you’re going to have 30-year transition rules—caused by the transition from one system to another will probably bankrupt hundreds, if not thousands, of companies. The reason for that is that they will be in violation of their loan covenants, and their banks will not renew the credit.
REIT.com: So you see no way if this was adopted to split the baby or do transition rules to ease implementation?
Sherman: The transition rules have to be as long as the loan covenants, and some of those are 30 years. You can’t have half of the business world use one standard because they don’t currently happen to have any applicable loan covenants because their loan covenants have a savings clause in them and then the other half of the business world use a different system.
I think it’s undisputed that if they take the capitalization approach, as opposed to the footnote disclosure approach, they will be adding $2 trillion to the balance sheets of American companies. That’s a big number. Even in Washington and as a member of Congress, $2 trillion strikes me as a big number.
If the FASB continues down this approach, they may achieve the notoriety and the popularity levels that have been achieved by Congress, which would really be saying something.
REIT.com: If the FASB deems it the appropriate approach to use capitalization, should the fact that it’s going to be lumping debt onto companies’ balance sheets be of FASB’s concern?
Sherman: If the FASB goes forward adding $2 trillion to balance sheets, then they are exercising governmental power in a way every bit as significant as actions taken by Congress and the well-known federal agencies. They are in the league of the SEC, the FTC, the EPA and the United States Congress itself in terms of the power and the effect. If that isn’t governmental power, it’s something very, very, very close.
REIT.com: In your mind, is there a more appropriate way for the FASB to address the concerns about leasing transactions?
Sherman: Put it in the footnotes.
And I also have to comment on the FASB process. The good news is that every member of FASB but one has talked to me for roughly half an hour. That’s because I’m a member of Congress that cofounded the C.P.A. Caucus.
Putting aside the loan covenants and looking at the other economic effects, they’re going to cost hundreds of thousands of jobs, and those jobs are of people who shower after work, not before work. And they haven’t talked to a single one of them.
Carpenters and painters, laborers and plumbers—they don’t know that this is going to cost them their jobs.
REIT.com: Are there any steps that the FASB could take from a procedural perspective to address your concerns there?
Sherman: From a procedural perspective, I would think that they would need to… (let) people know that millions of jobs are on the line. And then hold public hearings, lasting at least a day, in which any citizen was allowed to speak in at least 10 cities across America.
I want to stress that if they announce tomorrow that this is a project for footnote disclosure, then all my concerns procedurally and substantively go away.
REIT.com: Congressman, is there anything else that you’d like to add?
Sherman: The FASB is in a whole new world. They’ve issued dozens and dozens of pronouncements. None of them are in this league in terms of their economic effect and their effect on jobs.
Look at these economic studies, look at my letter and then look at these loan covenants. There’s no way to solve the loan covenant thing, short of a 30-year transition.