Lease Accounting: Minor Blip or Major Issue?

Retailers, restaurants, and cellular service providers are changing the way they account for leases, according to accounting analyst Jack Ciesielski, publisher of The Analyst’s Accounting Observer. The majority of restatements are coming from the retail industry and most of those have to do with rent holiday issues.

The SEC’s February 7 Letter to the AICPA identifies three types of issues that may arise in lease accounting. They are amortization of leasehold improvements, rent holidays, and landlord/tenant incentives. According to Ciesielski, these issues are most likely to occur in industries where leasehold improvement have been made on top of the property being leased, the landlord can make concessions to the leasee for the cost of leasehold improvements and the rent payment schedule differs from the straight-line recognition of rent expense.

The effect on the companies’ earnings is modest, though they are requiring many to submit earnings restatements to the Securities and Exchange Commission (SEC). Ciesielski points out that the issue becomes more serious if it is the long-running problem it appears to be.

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