Retailer TJX Cos. ($TJX) filed its latest Form 10-K report this week, for its 2018 fiscal year that actually ended on Feb. 2, 2019. Heed that date, because it’s an important reminder about the nuances of lease accounting and corporate balance sheets.
As we’ve written many times now, a new accounting standard for leasing costs went into effect on Dec. 15, 2018. Under the new rule (formally known as ASC 842), companies must start reporting the costs of operating leases as liabilities on the balance sheet, rather than bury those costs away in the footnotes.
For retailers like TJX, those operating leases can be expensive. TJX currently had $9.8 billion in leasing commitments on the books as of Feb. 2, according to the Commitments section of disclosures in the 10-K footnotes.
But wait, you say! Didn’t we just note two paragraphs earlier that the new accounting rule requires firms to report those costs on the balance sheet? What’s this footnotes business we’re mentioning now?
That’s why the Feb. 2, 2019 date is so important. Firms must adopt ASC 842 for the fiscal year beginning on or after Dec. 15, 2018 — and for TJX, its next fiscal year began on Feb. 3, 2019.
Little surprise, then, that TJX had this to say in its accounting policies disclosures about adopting ASC 842:
We will adopt this standard on February 3, 2019 using the optional transition method… On adoption of this standard we will recognize an operating lease liability of approximately $9 billion on our statement of financial condition as of February 3, 2019 with corresponding right-of-use assets based on the present value of the remaining minimum rental payments associated with our more than 4,300 leased locations.
Translation: TJX implemented a significant change to its balance sheet exactly one day after filing its 2018 annual report, where disclosure of that change was tucked away in the footnotes.
To be clear, this is entirely legal — and to a certain extent, even logical. After all, you have to pick some day to adopt a new standard; the start of a new fiscal year is a reasonable choice.
We only call out TJX today because noticing such details is important for astute financial analysis. The $9.8 billion in lease liabilities that piled onto TJX’s balance sheet on Feb. 3 is larger than all the company’s other liabilities, $9.2 billion, that existed there 24 hours earlier.
Shifts like that could have consequences for a firm’s debt covenants, if current liabilities suddenly cross some critical threshold as a portion of total liabilities. These shifts will also affect how a firm’s return on assets is calculated, since ASC 842 requires companies to add a “right of use” asset on the asset side of the balance sheet, to offset the liabilities.
TJX isn’t the only company with large leasing liabilities piling onto the balance sheet one day after filing the 10-K. In our recent master class video with Jason Voss, we called out Chipotle as another example. You can visit our Research page or search our blog archives for all the other material we’ve written about leasing costs. We even have a dedicated report on leasing expenses from last July, with a 2019 version coming this summer.
Suffice to say, there are plenty of examples to choose from.