Change Is A Comin'

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doberman's picture
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Joined: 2005-02-22

An article in CFO Magazine, July 2007 issue - page 77, caught my eye. In 2 years, a major accounting change will take place concerning "lease accounting".
First some background: Currently, a large retail chain can avoid putting most of what they lease off their balance sheet by setting-up a captive reit (captive, meaning the company alone owns all the reit stock). The company then identifies a potential store site. The captive reit then buys the site and the company leases the site from the reit. Then, the reit pays dividends to the company. (There are various tax benefits with this set-up, as well.)
In two years, these same companies will have to account for these leases on their balance sheets. The SEC estimates that there are $1.25 trillion of these future cash obligations that reside off the books.
Some of the companies that will be affected by this change are: CVS, Home Depot, Kroger, Walgreen, & (the biggest gorilla of all) Walmart
The primary concern with the change, is that the ratios used by investors, banks, etc. to decide whether to invest or lend money will be dramatically and adversely affected. The article states that new ratios will have to be developed to account for these changes. Also, the article mentions various possible scenarios that might take place after the change, so nailing down how the change will affect stocks is still uncertain.
So, how can knowing about this change benefit you? Well, if you have a prospect who owns stock in the abovementioned companies (or any company that employs these methods), mentioning this change could make you look like genius compared to the other broker. 
Ahhhhhhhh, I can picture it now. As soon as your prospect hears the news from you, they call their broker and ask about this accounting change. The other broker says, "Huh, what accounting change?" 
You can thank me, later.

rightway's picture
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Joined: 2004-12-02

Thank you.  Good information.

doberman's picture
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Joined: 2005-02-22

An article in CFO Magazine, July 2007 issue - page 77, caught my eye. In 2 years, a major accounting change will take place concerning "lease accounting".
First some background: Currently, a large retail chain can avoid putting most of what they lease on their balance sheet by setting-up a captive reit (captive, meaning the company alone owns all the reit stock)...
----------------------------------------
My English teacher would be appalled! 
I corrected the grammar (in red), in the above sentence. Sorry about the double negative. Now, if you'll excuse me, I've got to write 200 times on the board; "Double negatives are incorrect grammar."

doberman's picture
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Joined: 2005-02-22

Geesh!!! I'm going to lay down for a while!
Let's try this again. The grammatical correction (in red) doesn't include the term "lease accounting".
My apologies again, for these two unnecessary posts.

AllREIT's picture
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Joined: 2006-12-16

doberman wrote:An article in CFO Magazine, July 2007 issue - page 77, caught my eye. In 2 years, a major accounting change will take place concerning "lease accounting".

Capital Lease accounting is not very related to the issue of using
capitve REITs to avoid paying state taxes via intercompany rent.

Anytime you do a capital lease (e.g do a sale and leaseback of a store)
you have this issue of contractual rent entering the the P/L via cost
of goods sold. If WMT wasn't doing sale/leaseback with its own REIT it
would be doing them with someone else.

It has little effect, since capital leases are listed in the
contractual obligations section of the Q/K and credit analysts are very
aware of them and the issues involved. This is what "fixed charge coverage" is all about.

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