Tuesday, April 4, 2017

Leasing is a part of life for Internet companies. They lease office space for people, and they lease equipment for their tech operations. And given the nuances of how lease expenses are incurred and reported, those costs for the Internet sector make for a good example of how you can use Calcbench databases.

First, the accounting rules. Operating leases are liabilities. That means the cost of the leases should be reported on the balance sheet—except that companies don’t actually include those costs there. Current accounting rules allow companies to keep leasing costs off the balance sheet, with details hidden away in the footnotes. There, you can see a year-by-year breakdown of the costs for the next five years and “thereafter,” a period that includes all future costs.

Those lease costs can get quite large over time. How large? We selected eight Internet businesses and decided to take a look: Amazon, Baidu, eBay, Facebook, Google, Snap, Twitter, and Yelp. Here are the future minimum payments due (they could always lease more space and incur even more cost) as reported for 2015 and 2016.

You can find this data on either the Company in Detail page or the Multi-Company page (if you’re looking for more than one company). Just start typing “lease” in the Search Standardized Metrics text box, and the option for operating lease payments will appear.

Lovely, but that only gives us the raw numbers for operating lease costs. We still want to benchmark those costs against something else—like, say, the company’s total liabilities. To do that usefully, however, first we need to determine the net present value of the operating lease costs.

Getting to a Benchmark

We calculated NPV by building our own simple model in Excel. You can build your own too, or Calcbench subscribers can drop us an email and ask for help. (See what we did there, subtly promoting our customer service?)

In our model, we assume a discount rate (the discount we apply to future cash flows, assuming a dollar in the future will be worth less than a dollar today) of 3 percent. Then we apply that rate to all future lease obligations, to estimate the real cost of these liabilities. Finally, we divide that amount by total liabilities now, to give us a percentage.

The numbers look like this.

You can see that the ratio of operating lease liabilities to total liabilities varies quite a bit. But let’s get to the obvious point from this chart—whoa, Yelp!

Yelp’s operating lease costs are more than three times as much as its total liabilities. That’s what off-balance sheet liabilities are: liabilities that do exist, but aren’t listed on the balance sheet. And yes, they can be larger than total liabilities on the balance sheet.

Why has Yelp decided to shoulder such a large leasing cost? We don’t know. We merely use Yelp as an example of how Calcbench can help financial analysts: by letting you conduct precise research, so you can ask the right (and sometimes pointed) questions of corporate management, so they can tell you why the business is the way it is.

We should also note that the Financial Accounting Standards Board has decreed an end to the practice of keeping operating lease costs off the balance sheet. Starting in 2019, all those costs will appear on the balance sheet.

For a company like eBay, that change shouldn’t be a big deal. For a company like Yelp, however, it could be an enormous deal. Calcbench can help you understand how your favorite companies will be affected.

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