A review of several disclosures in annual reports does little to mitigate concerns that there could be Bigger Impacts from the new lease standard than most realize.
”Operating leases are disclosed in the footnotes of your financial statements as off balance sheet operating expenses and excluded from important financial ratios such as Return on Assets that investors use to judge a company’s performance” noted Lease Accelerator’s article Who is Most Impacted by the New Lease Accounting Standards.
Whether companies are waiting for a time closer to the effective date to disclose more information, or they truly do not know the effect the leasing changes have on their financial statements and operations, remains up for debate. What is for certain is that market participants are assessing all angles.
The following is a look at the disclosures in annual reports of three companies in the airline industry Boeing, Air Lease Corporation, and Southwest Airlines. Note that the middle column are notes direct from the annual report, whereas the right column shows leases as a percentage of total assets, something currently not disclosed, but gives a clearer picture of the impact.
Analysts and investors need to look deep into details on lease disclosures, and even when they do they are often met with a standard disclosure of immateriality. In the case of Southwest Airlines, analysts and investors need to determine how 14% of new assets will affect everything from debt ratios on loan agreements, finance ratios used to value the stock, to the systems and internal controls necessary to document and comply with the standard.
“Recognizing lease-related assets and liabilities could have significant financial reporting and business implications” says EY in their April, 2016 article Technical Line – How the FASB’s new leases standard will affect airlines. They go on to note that “airlines should consider how they will communicate changes to their financial reporting to investors and other stakeholders.” Even if investors are given notice of no impact, could more be disclosed?
We can expect more disclosures in the 2017 annual reports, but by that time the implementation effective date will be less than one year out, and if the disclosures are not sufficient, the verbiage in the 2018 annual report could be dramatic!
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