Companies in the Standard & Poor's 500-stock index have more than $300 billion in leases that don't show up in the balance sheets, according to estimates by Bear Stearns Cos. (BSG
) and Credit Suisse Group (CSR
). Retailers, ahead of transportation and financial services companies, have the most. The tally rises to $1.25 trillion when all public companies are taken into account, estimates the Securities & Exchange Commission, which last June recommended a rethink of lease accounting.
Putting those leases on corporate balance sheets as liabilities would greatly change how indebted the companies appear. Bear Stearns predicts an aggregate 17% jump in debt levels for all nonfinancial companies in the S&P 500. "It paints such a different picture for many companies. I think that takes some people by surprise," says Credit Suisse analyst David Zion.
How heartily companies will argue against a change may depend on their existing debt burden. Bed Bath & Beyond Inc. (BBBY
) doesn't have any bank borrowing, so a rise in debt couldn't affect them in that regard. Says Chief Financial Officer Eugene A. Castagna: "Whatever the rules are, we'll follow." Many companies declined to comment before a specific rule change is proposed, but drugstore giant CVS Corp. (CVS
) does argue that the Credit Suisse analysis may be too negative. Multiplying eight times a single year's lease expense -- a method that some credit analysts already rely on -- puts CVS's liability at $9.9 billion, management says. That's $1.2 billion less than Zion's number.CLOSING LOOPHOLES
Over the past 30 years, hundreds of accounting rules and regulations have been issued on leases, and critics say the result is an industry of experts practiced at how to keep them off the books. Currently, if lease payments add up to 90% of the value of the leased property, the lease must go on the balance sheet. So, says FASB Chairman Robert H. Herz, cookie-cutter templates have been created to design leases so that they don't add up to more than 89%. One argument for leaving leases off the balance sheet is that lessors don't have ownership rights -- they can't resell the asset, for example. But many accounting experts consider a promise to pay rent an obligation equal to any other liability.
One new model that FASB will explore, says Herz, would treat a lease as a "right to use" the property, which would be given a value and included among the liabilities and assets of the company that is leasing it. Companies argue that information about these leases is not secret, but is readily available in the footnotes of their annual reports. However, Bear Stearns analyst Chris Senyek has found that such disclosure is far from consistent, with some companies leaving out vital information such as the length of the lease. And the databases that many investors consult to sort through a company's performance generally don't include the data from footnotes.
There will be plenty of time to argue all the points. Herz doesn't expect new rules to be finished before 2008 or 2009 at the earliest. By Nanette Byrnes