Companies with biggest lease liabilities face new accounting standard
Walgreens, CVS and AT&T top the list of U.S. companies with the most operating lease liabilities that will need to be added to their balance sheets under the new leasing standard, according to a new report that ranks Fortune 1000 companies by their leasing obligations.
The report, from LeaseAccelerator, a provider of lease accounting software, found that Walgreens Boots Alliance, with $32.811 billion in operating lease liabilities, was in first place, followed by CVS Health, with $27.151 billion in second place, and AT&T, with $25.928 billion in third place. They were followed by Amazon ($22.848 billion), Verizon Communications ($20.734 billion), FedEx ($17.874 billion), United Continental Holdings ($16.251 billion), Delta Air Lines ($16.236 billion), Walmart ($15.366 billion) and Bank of America ($14.5 billion), rounding out the top 10.
The lease accounting standard, also known as ASC 842 under U.S. GAAP and IFRS 16 under International Financial Reporting Standards, differs somewhat in the U.S. and international versions, despite years of convergence work by the Financial Accounting Standards Board and the International Accounting Standards Board. However, both versions of the standard will be adding operating leases to the balance sheets of many companies for the first time. The standard is taking effect at the end of the year for public companies.
The new standard will require U.S. public companies to transfer an estimated $3 trillion of operating leases onto corporate balance sheets as right-of-use assets and corresponding lease liabilities. Previously, only a limited set of information about operating leases has been reported in the footnotes of SEC filings. However, under the new ASC 842 and IFRS 16 standards, companies will be required to add new line items to the balance sheet for these operating leases. That means some of the main financial metrics, including return on assets, asset turnover and the quick ratio will be affected by the accounting changes.
Collectively, the top 1000 public companies in the U.S, will add up to $983 billion in operating lease liabilities, according to LeaseAccelerator’s report. While companies in almost every industry have leases, there’s an especially high concentration of leases in the retail, airline and telecommunications sectors. The retail industry is expected to experience the largest proportional balance sheet change from the new standards because it’s common to lease store locations. Many companies are still trying to get ready for the new leasing standard, and privately held companies will get an extra year to do it, but LeaseAccelerator is encouraging companies to get up to speed.
“With less than six months remaining until the initial deadlines for the new lease accounting standards, CFOs need to start developing strategies for communicating these balance sheet changes to their investor communities” said LeaseAccelerator CEO Michael Keeler in a statement. “We hope that this report will help companies understand and compare the level of impact they will experience from ASC 842 relative to their peer group.”