REFORM OF LEASE ACCOUNTING STANDARDS SUMMARY: The lease accounting proposal by the G4+1 Special Report stated that all leases both operating and finance should be included and recognised in the companies’ Balance Sheets. This report is conducted to contribute as an additional prove whether a reform in lease accounting standards is accepted or not by the relative public, preparers and users of financial statements. Many empirical studies showed that there have been many conflicts between the preparers of the financial statements and their users. According to Beattie, V., Goodacre, A. and Thomson, S.J. (2006), the conflicts were found in how these two groups view the proposal of the lease accounting standards and their opinion about the economic consequences after adopting those proposed standards. The scope of the report is to prove that the new lease accounting standards are not of high quality and there were positive responds about the reform of these standards but negative responds that the reform will lead to positive economic consequences as well as it makes recommendations about amendments in the proposed lease accounting standard. INTRODUCTION: Leases provide an important source of financing for companies all over the world. G4+1 proposal was that both types of lease should be included in the balance sheet. By including both types of leases in the balance sheet many things would be affected such as important standard performance measures such as the gearing ratio and returns on assets ratio. According to Beattie, V., Goodacre, A. and Thomson, S.J. (2006), in their study “International lease accounting reform and economic consequences: the views of UK users and preparers”, examined preparers of financial statements and their users views about the new proposal by G4+1, believing it would lead to negative consequences in the economy. This report is analysing the view of both users and preparers of financial statements about the proposal of G4+1 to be included in the leasing accounting standards and about the economic consequences after adopting the proposal. THE PROPOSAL BY G4+1: According to IAS17, a lease is “an agreement whereby the lessor conveys to the lessee (in return for rent) the right to use an asset for an agreed period of time. A finance lease is capitalised, therefore recognised on the balance sheet. Operating leases are not capitalised. G4+1 published a special report “Accounting for leases” and through that report, proposed that both types of leases should be included in the balance sheet with result balance sheets having additional assets and liabilities. THE VIEWS OF PREPARERS AND USERS ABOUT THE PROPOSAL: In general, there was a wide acceptance by both groups to have accounting standards in general but the disagreements between users and prepares were mostly about specific lease accounting standards. Empirical research showed that preparers agreed with users that there was bias and manipulation in the current lease accounting standards as well as they were incomplete. However, there has been noticed a disagreement about whether deficiencies in the current leasing accounting standards were affecting the decision making by these two groups. Users responded positively and preparers negatively. In addition, preparers found to be more familiar with balance sheet transactions of the two types of leases and the reason for this is because users lack of the appropriate knowledge of accounting treatments and transactions. Users found to be more positive and able to accept the general principles proposed by G4+1 but preparers proved to be less positive. Preparers agreed only with two principles which are: To recognise material leases on the balance sheet and Apply to both types of leases one accounting method Preparers in general, found to be against the proposal by G4+1 with a main argument to be cost-benefit considerations and concern about the operation of the reformation where in contrast, users appear to be neutral. ECONOMIC CONSEQUENCES: With no doubt, by altering accounting standards can result in economic consequences, adverse or favourable. Both groups of preparers and users of financial statements express an opinion that adding non-current assets and liabilities in the companies’ balance sheet would change the gearing ratio and other adverse consequences such as the decrease in credit ratings for many companies, the companies comparisons would face an improvement as well as users would be able to evaluate better long-term commitments. Both groups also believed that obligations of the balance sheet would be minimised as well as both investment and property market would not face any change. As a result, the two groups agreed that a reform in the lease accounting standards would lead to important economic consequences. The conflict therefore have risen in the fact that users want the G4+1 proposal to be adopted but preparers preferred to find and adopt other alternative proposals instead of those proposed by G4+1, expressing that they were unsatisfied. ECONOMIC CONSEQUENCES FOR SMALL BUSINESSES: The economic consequences for small businesses would be adverse, since costs and debt will increase as well as earnings and capital will decrease. The proposal states that all leases of material value or not should be included in the balance sheet. This would affect small businesses as for example, if a small company has a lease of £1100 of office equipment it must be included on its balance sheet and the transactions would become more complicated leading to high costs of bookkeeping and analysis. This complexity will also lead to difficulty of preparers and users to compare companies using financial statements as well as less understanding of these statements. In addition, further costs will occur for small businesses such as costs for training of employees to learn applying the new standard into the financial statements and then employ the new lease accounting standards into these statements. Under the new proposal by G4+1, small companies will be engaged to costly and more complicated tasks. CONCLUSION: The interests of preparers and users conflict between them. There were balanced opinions about the reform of lease accounting standards both negative and positive resulting that the proposal was not satisfying both groups and did not have favourable economic consequences. This reflects that the proposal was not of high quality to be included in the accounting standards as well as it did not reflect a clear distinction between the two types of leases and their treatment. The opinion of the two groups about lease contracts would contribute to the idea that lease standards must be reformed. As a result, instead of adopting G4+1 proposal into accounting standards, it would be preferred to reform the existing proposal to be included the accounting standards which then, it would lead to favourable economic consequences for all the economy including both small and large companies. RECOMMENDATIONS: Appreciating the effort of IASB and G4+1 to propose efficient accounting standards, it is suggested that the proposal of G4+1 should be adopted and be included in the lease accounting standards but not with the current format. The following points recommend a transformation/reform of the proposal in order to be less difficult for adoption by small companies and face fewer costs for applying the new lease accounting standards as well as to overcome the conflicts between users and preparers in their view of the proposal and its economic consequences. It would be recommended to include exceptions for the new treatment of the leases for small companies. For example, companies with leases up to £150 000 could be exempted from the standard in order to prevent from all the high costs of the procedure. It is suggested to solve the conflicts between users and preparers of the financial statements according to their views upon the proposal and the economic consequences that will arise and prepare an alternative proposal with the key interested parties to agree with each other. This can be achieved by providing users with more simple description and guidance about the new accounting treatment of the leases in order to overcome the fact that they lack of the appropriate knowledge and become more organised and more familiar. Preparing an alternative proposal that will satisfy both parties seems more efficient than G4+1 proposal. It is also recommended to balance the economic consequences arising from the implementation of the proposed lease accounting standards with the proposed rules of accounting treatment of leases. A new proposal is needed that will not have serious economic consequences. Amendment of the current rules is needed in order to overcome their current deficiencies.