Proposed changes to how companies account for leases could mean significantly lower earnings for retailers, according to Reuters.
Two groups, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), are considering rules changes that would mean retailers would now have to account for interest expenses based on a lease's present value.
The rule change would mean that leases would now be included in balance sheets instead of as a footnote in financial statements.
According to the a study by the accounting boards, if the proposed accounting change were in place in 2006, BJ's Wholesale Club would have seen earnings per share drop from $1.40 to 28 cents. Saks would have gone from being five cents on the plus side to a down 44 cents a share. On average, earnings from 19 companies studied were reduced by 5.3 percent.
The study's authors said these figures and others make "clear that excluding operating leases from the balance sheet causes a material distortion of the financial position of the company."
There are some retailers that benefited under the proposed rule changes as amortization and depreciation of leased properties were less than the costs of rent. Wal-Mart would have earned three cents more per share and J.C. Penney would have increased its earnings by 11 cents.
If the proposed changes are adopted, probably in 2009, companies can expect to see major challenges on balance sheets. Both assets and liabilities are likely to increase, according to the study's findings.
Discussion Questions: Are changes needed to the present accounting rules used by U.S. retailers? Do current accounting requirements provide a clear picture of a retailer's health on its balance sheet? What impact do you think that the proposed change in accounting for leases would have on retailers' approach to real estate and/or other aspects of business?