First-quarter reports reflecting new lease accounting rules are beginning to trickle into the market, adding billions in assets and liabilities to balance sheets.
Restaurant Brands International, for example, added $1.5 billion in operating leases to its first-quarter 10-Q that didn’t exist in the company’s 2018 year-end filing. The company also added $1.01 billion in liabilities associated with operating leases and $287 million in liabilities tied to finance leases. The company franchises and operates nearly 26,000 restaurants under the brands Tim Hortons, Burger King, and Popeyes, making it a significant holder of leases both as lessee and lessor.
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Calendar-year public companies are required to adopt Accounting Standards Codification Topic 842 on leases with their first quarter reports in 2019, bringing virtually all lease-related assets and liabilities on to corporate balance sheets. Experts have reported public companies ended up in scramble mode approaching the first reporting deadline and plan to continue to work on their systems, controls and processes even after their first reporting under the new accounting.
Restaurant Brands International provided a lengthy footnote in its first-quarter filing to explain how its financial statements are changing as a result of both lessee and lessor arrangements with respect to its assets, liabilities, equity, along with a maturity analysis for lease receipts and lease commitments through 2023 and beyond.
A smaller quick-serve restaurant operation at 2,500 locations, Chipotle indicated in its first-quarter earnings release it will gross up its balance sheet with a $2.35 billion right-of-use asset in its first-quarter filing. That will increase total assets from $2.27 billion at Dec. 31, 2018, to $4.63 billion on March 31, 2019.
Chipotle says its current operating lease liabilities amount to $157.7 million while its long-term operating lease liabilities total $2.51 billion. The company also reports an amortization of operating lease assets of $38.1 million in its first quarter income statement. Electing the practical expedient that allows companies to adopt the standard without restating prior periods, Chipotle posted a $2.3 million adjustment to retained earnings to reflect the transition.
Sandy Peters, head of financial reporting policy at the CFA Institute, says she was surprised to see Chipotle to make no mention of the increased balance sheet metrics in its earnings release. She’s keeping an eye out for filings later this year big-name retail companies who are expected to be heavily affected by the standard but whose fiscal year-ends do not align with the calendar year.
Penske Automotive Group, which operates automotive and truck dealerships, is an early reporting retailer showing significant balance sheet effects from the new accounting. The company added $2.42 billion in right-of-use assets to its balance sheet in its first quarter, along with long-term operating lease liabilities of $2.38 billion. The company also reports proceeds from sale-leaseback arrangements of $7.3 million.
Penske’s total assets grew from $11 billion at Dec. 31 to $13.6 billion by March 31 as a result of adding leases to the balance sheet. Liabilities grew similarly from $8.27 billion to $10.9 billion.