FASB in US Strengthens Off-Balance-Sheet Reporting Guidance, But Errors Persist

The Financial Accounting Standards Board, the designated organization for establishing financial accounting and reporting standards, toughened up its rules for off-balance-sheet reporting in late January, but is it a case of too little, too late?

Only yesterday, Provident Financial Group Inc., the parent of Provident Bank, announced that it will restate earnings for the last six years because of accounting errors. Cincinnati-based Provident said the restatement is a result of incorrectly reporting nine auto-lease financing transactions that originated between 1997 and 1999 as off-balance-sheet financing.

The company said none of the deals should have been reported off-balance-sheet as a sale and lease back of operating leases (an accounting term which refers to a lease that remains off-balance-sheet). The appropriate accounting practice was to report the transactions as financing leases with all assets and related liabilities included on the balance sheet, the company said.

Using off-balance-sheet financing is a common practice, said one accounting professor, as companies try to beef up their financial statements.

“To improve their balance sheets, lots of firms work hard to keep debt off-balance-sheet,” said Edward Ketz, an accounting professor at Pennsylvania State University. “I know that lots of firms play these games and it’s quite possible that a lot of them may try to stretch the rules. The problem is the rules give such flexibility that companies could argue [they’re in the clear].”

The new FASB guidance strengthens existing accounting rules which clarify when a company should include the assets, liabilities and activities of another entity in its financial statements. It applies to new entities that were created after January 31, 2003 and to all other entities as of June 15, 2003.

James Shultz, an analyst with Stephens, Inc., said the dollar amount of the nine Provident lease transactions — roughly $800 million — is not a cause for concern.

“I don’t think this operating restatement is significant. These are super subprime credit auto leases, which is a product line that I think will continue to do well,” he said.

Accounting errors “will be with us,” Ketz said, though he remained optimistic that further scrutiny will prompt stricter accounting guidance.

“FASB is under such pressure to improve things,” Ketz said.

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