New Leasing Standards' Effect on Apple


Apple, with its roughly 500 retail stores, manufacturing, research & development, sales and operations facilities will soon have billions of dollars in new right of use assets and lease liabilities added to its balance sheet. The company recently reported total assets of $322 billion, total liabilities of $193 billion, and the present value of minimum lease payments for operating rent expense totals $7.6 billion.

With Apple’s “mother of all balance sheets,” as quoted by CEO Tim Cook, the lease changes on an aggregate basis may not be material to Apple. However, that does not mean that a major strategy play is not under way.

PwC states in the article, The Overhaul of Lease Accounting, Catalysts for Change in Corporate Real Estate, “many companies, especially those that utilize significant real estate as part of their operations, are already reconsidering their real estate strategies” and “in many cases, this reconsideration is part of an effort to unlock shareholder value in existing assets or to provide growth capital.” Apple tends to do the seemingly insignificant things on a grand scale. For example, its shareholder return policy is returning over $250 billion to shareholders through dividends and buybacks—a standard policy executed by many companies, however done much larger by Apple. That's the advantage of its scale, and one could expect it will do the same with its leasing strategy.

The Wall Street Journal’s report Apple Gets Sweet Deals From Mall Operators references real-estate researchers Green Street Advisors noted “Apple draws so many shoppers that its stores single-handedly lift sales by 10% at the malls in which they operate.” The report further states that Apple is “using its bargaining power to pay no more than 2% of its sales a square foot in rent. That compares with a typical tenant, which pays as much as 15%.” This is where Apple, and others, will try to unlock further shareholder value. With the entire industry going through the same lease changes, Apple may just need to be comparatively better than its competitors with new lease ratios yet to be developed.

Another such way to measure and compare leasing success could be the ratio and trend derived from revenue to the capitalized right of use assets. The table below compares the TTM revenue of Apple, Microsoft and Alphabet, divided by its most recently reported minimum lease operating payments. 

 

   Revenue TTM  Present Value MLP*  Revenue to MLP
 Apple  $216  $7.6  28
 Microsoft           $85  $6.4  13
 Alphabet   $86  $7.4  12
   Figures in billions    
   *Most recent fiscal year    
       

 The table shows that Apple earns enough revenue in one year to pay its lease payments roughly 28 times over, whereas Microsoft or Alphabet can pay its lease payments only 13 and 12 times respectively.

Apple addressed leases in its 10K by stating that it will be “effective for the company beginning in its first quarter of 2020, and early adoption is permitted. The Company is currently evaluating the timing of its adoption and the impact of adopting the standard on its consolidated financial statements.”

 

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Sources:

Leases Topic 842, ASU 2016-02

http://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010&acceptedDisclaimer=true

PwC’s article The Overhaul of Lease Accounting, Catalysts for Change in Corporate Real Estate

https://www.pwc.com/us/en/asset-management/real-estate/publications/assets/pwc-overhaul-of-lease-accounting.pdf

Apple's 10k fiscal year ended September 30, 2016

http://files.shareholder.com/downloads/AAPL/2456063358x8143945x913905/66363059-7FB6-4710-B4A5-7ABFA14CF5E6/10-K_2016_9.24.2016_-_as_filed.pdf

Alphabet’s 10k fiscal year December 31, 2015

https://abc.xyz/investor/pdf/20151231_alphabet_10K.pdf

Microsoft’s 10K fiscal year ended June 30, 2016

https://www.microsoft.com/en-us/Investor/sec-filings.aspx

WSJ Article Apple Gets Sweet Deals From Mall Operators

http://www.wsj.com/articles/apple-gets-sweet-deals-from-mall-operators-1426007804