New lease accounting standard could mislead investors, says Credit Suisse

The new lease accounting rules have resulted in potentially misleading data flows, inconsistent financial reporting and other discrepancies that could confuse and misinform investors, Credit Suisse Group analysts said in one of the most critical warnings. details of an investment bank since the standard came into effect for public enterprises. at the end of last year.

The new Financial Accounting Standards Board standard requires companies to report operating leases as liabilities on the balance sheet, rather than in the footnotes of financial statements, as required under the old rules. This change can inflate debt on the balance sheet.

The magnitude of the impact of the standard – with trillions of assets and bonds entering corporate balance sheets – could skew traditional metrics found in popular investor data sources, said Ron Graziano, Director of Global Accounting and Taxation at Credit Suisse and one of the authors of the report. Credit Suisse’s HOLT Group, which published the report, provides quantitative analysis of more than 20,000 companies to help clients make better investment decisions.

“Any change of this magnitude can be disruptive,” Graziano said. “The real problem is that it has an impact [metrics such as]return on invested capital and leverage, and this can cause significant market distortions. “

The problem is whether operating leases are automatically included in key financial metrics by data providers and whether investors are aware that their data feeds have made these adjustments, Graziano said.

To comply with the new standard, data providers have been forced to change the way financial statements items such as debt; tangible fixed assets or tangible fixed assets; and earnings before interest, taxes, depreciation and amortization, or Ebitda, are presented, according to the report. But without clarity on the impact of the new standard on the calculation of specific metrics by each data provider, investors may inadvertently translate this information into their financial screens and models without making their own adjustments, leading to distortions.

For example, according to the report, some data providers have classified the right-to-use assets of newly created operating leases as property, plant and equipment. Credit Suisse questioned the economy behind the move and said it could conflict with how companies report it on the balance sheet.

The report identified the deposits of American Airlines Inc.,

the cheesecake factory Inc.,

Deutsche post AG

and others as examples of rental accounting disclosures that might confuse or at least surprise investors.

“It’s a caveat about the analytical impact, which is especially important in the retail and transportation industries, where they have a lot of leases but the balance sheets aren’t huge,” said Sandra Peters, responsible for financial reporting policy for the CFA Institute, an association based in Charlottesville, Va. that represents chartered financial analysts.

Since data analysis has changed under the new standard, investors need to look beyond financial statement footnotes to enter the correct information, Ms. Peters said.

The new FASB lease accounting standard will apply to private companies for years beginning after December 15, 2019. The standard came into effect for public companies for years beginning after December 15, 2018.

Write to Mark Maurer at [email protected]

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