One of the most enlightening aspects of financial statement analysis is in examining the footnotes of firms. Calcbench set out to systematically analyze the off-balance sheet debt of US firms by first looking at the commitments that these firms have made in their leasing obligations (report here) . What we found was eye-opening.
First, the idea that a firm will lease assets is nothing more than a financing decision. A lease gives the lessee, the right to use an asset (e.g. store, computer or vehicle) for a specified term and expense. Since the lessee does not assume the risk of ownership, the lease does not have to be put onto the balance sheet. In many cases, this simple action may distort the assets and liabilities of the underlying firm.
So we asked a few simple questions.
1. What would balance sheets look like if operating leases were put back onto the balance sheet?
2. Which firms / sectors will be most effected?
3. How have these obligations changed over time?
Our results are summarized in the Operating Lease Report on our website. Please download it and have a look for yourself.
But, here are some highlights. Retail trade and Manufacturing have the largest estimated liabilities in the S&P500. This is not unexpected as they have large property, plant and equipment obligations.
What was surprising to us was in the firm level observations. It appears that in several cases in the retail sector, the off-balance sheet lease obligations are of significant size. In a few cases, they are 1 or 2 times the size of the 2014 Total Liabilities of the firm! In over 50 specific firms off balance sheet operating leases represent more than 15% of the outstanding liabilities!!
All of this would not be possible without extensible Business Reporting Language (XBRL).