September 21, 2019

New Leases Standard About to Really Blow Up Drug Store Chains’ Balance Sheets

We are T-minus 155 days away from financial executives at U.S. public companies saying a couple of Hail Mary’s, keeping their fingers and toes crossed, and hitting the “go” button on adopting new accounting rules for reporting leases.

Accounting Today reported that two popular drug store chains top the list of Fortune 1000 companies with the most operating lease liabilities that will need to be added to their balance sheets under the new standard, which goes into effect Jan. 1, 2019.

The report, from LeaseAccelerator, a provider of lease accounting software, found that Walgreens Boots Alliance, with $32.811 billion in operating lease liabilities, was in first place, followed by CVS Health, with $27.151 billion in second place, and AT&T, with $25.928 billion in third place. They were followed by Amazon ($22.848 billion), Verizon Communications ($20.734 billion), FedEx ($17.874 billion), United Continental Holdings ($16.251 billion), Delta Air Lines ($16.236 billion), Walmart ($15.366 billion) and Bank of America ($14.5 billion), rounding out the top 10.

The top 1,000 U.S. public companies alone have nearly $1 trillion in operating lease liabilities, according to the report.

Although companies in almost every industry have leases, there’s a particularly high concentration of leases in the retail, airlines, and telecommunications sectors. The retail industry is expected to experience the largest proportional balance sheet change from the new standard because it’s common to lease store locations, according to the AT article.

Bill Bosco, a principal at the consulting company Leasing 101, told AT in 2016 that Walgreens had about 8,400 real estate leases, and that was before they acquired Rite-Aid and Alliance Boots.

And real estate leases are pretty complex, Bosco said, because most are “gross-filled leases,” meaning that the lessee pays for not only rent, but also for common-area maintenance, utilities, landscaping, and a variety of other services.

“It’s a full-service bundled lease in most cases. Some leases are triple net leases. The new rules say you only have to capitalize the lease portion. To record a real estate lease, it means you’ve got to get the lease document, you’ve got to read the lease document, you’ve got to find out whether it’s a gross-filled lease or not, you’ve got to go back in time and get the details of the portion of the payment that’s a lease payment or not, and you might have to call up the landlord and get some information. When you transition in 2019, the SEC requires comparative statements, so you’ve got to do a P&L for 2017, 2018 and 2019, and the balance sheet for 2018 and 2019. That means you can’t just start working on it in 2019.”

Good luck, Walgreens.

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