January 27, 2020

Twitter’s Latest 10-Q Is a Perfect Example of Why No One Wants New Lease Accounting

We all know Twitter — like a lot of "successful" tech companies — isn't exactly making profits hand over fist despite decent revenue but did you know how bad their lease situation is? Spoiler alert: it's bad.

In their latest 10-Q filed with the SEC a few days ago, we find the following:

So total operating leases of $829 million. For the period ended 6/30/14, Twitter reports $538 million in on sheet liabilities (capital leases included), with revenue of $562 million. If operating leases were added to the balance sheet total, it would be a liability increase of 154%.

Is this a huge surprise to anyone? Probably not. We're doubtful this "news" will send Twitter stock into bargain basement territory.

Emily Chasan explained in CFO Journal recently why — if the numbers above don't clear it up — lease accounting changes are such a big deal:

The primary goal of the joint lease accounting overhaul has long been to push companies to bring about $2 trillion in off-balance sheet leases onto the books. Investors complain that today’s off-balance sheet leases obscure a company’s true liabilities, and that they often have to adjust calculations to include these expenses. Off-balance sheet leases may be understating the long-term liabilities of companies by 20% in Europe, by 23% in North America, and by 46% in Asia, according to IASB research.

FASB and the IASB may not agree on how exactly to change lease accounting, but they do agree that leases should be better reflected on sheet. Which, for companies like Twitter, means a huge change in total liabilities almost overnight.

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