Accounting reforms threaten to wipe millions off retail company profits

Leading retailers like Marks & Spencer and J Sainsbury could have to make hefty revisions to their accounts under new rules being discussed by standards setters.

The changes could affect any company that has entered into "sale and leaseback" property deals, such as the Big Food Group, SFI and Marconi.

Under the present rules, the transactions flatter accounts. When property is sold, it boosts profit and cashflow. Last year M&S recorded a £51m profit, while Sainsbury's has booked a total £133m profit over the past three years. But the practice could soon be banned.

The transactions involve the company entering long-term leases on the same property it sold, although these are not included in liabilities on the balance sheet.

The UK's Accounting Standards Board has been probing accounting for leases on behalf of the International Accounting Standards Board. The IASB still has to discuss the changes before a formal proposal is made, and it could be several years before they come into effect. But if they are imposed in their strictest form, companies would have to restate the transaction as a loan rather than an operating lease, wipe out any profits booked and substantially increase debt.

"The ASB and the IASB recognises a new approach is needed that must address the issue of sale and leaseback," said Andrew Lennard, ASB's director of operations. "To the extent that they have elements of financing transactions, we must ensure they are treated as loans."

He could not comment on individual companies.

Any group with large leases would be affected, such as airlines that rent their aircraft. Sir David Tweedie, head of the IASB, said: "I doubt you've ever flown in an aircraft that's on the balance sheet."

M&S said it was keen to be transparent. Sainsbury's declined to comment.

Companies doing sale and leaseback often argue that property is sitting on the balance sheet at undervalued levels, so the deals crystallise shareholder value.