We return today to the new standard for lease accounting, and the profound effects that new standard can have on certain filers. Today we’re going to look at the retail sector.
The retail sector intrigues us because those firms lease huge amounts of space for their stores. So once the new leasing standard (ASC 842) went into effect at the start of this year, and firms had to start reporting all those costs on the balance sheet — what happened to the balance sheet of retailers?
To explore, we compiled a peer group of 21 large retailers to study. Then we visited the Data Query page and looked at total liabilities per quarter, from the start of 2016 through first-quarter 2019. See Figure 1, below.
Look at that spike at the end of the chart. Liabilities jump 18.6 percent — from $354.6 billion at the end of fourth-quarter 2018, to $420.5 billion for first-quarter 2019.
We also know that operating lease liabilities in first-quarter 2019 were $72.4 billion. So if you do the math, all of the increase in liabilities for these retailers came from adopting the lease accounting standard. (In fact, other liabilities actually fell by a small amount in the first quarter.)
But wait, there’s more! ASC 842 also requires firms to report the value of leased items as a “right of use” asset, to offset those liabilities. So we also looked at what the retailers were reporting for total assets.
As you can see in Figure 2, the same spike happened for assets. They jumped $61.79 billion in Q1 2019, an increase of 12.3 percent.
Again, this is entirely due to the retailers reporting right-of-use assets on the balance sheet. Those ROU assets totaled $66.4 billion in Q1 2019. So just like liabilities for this group, assets actually would have declined at the start of this year had it not been for a new accounting standard.
Let’s also remember that operating lease liabilities were $72.4 billion, while ROU assets were $66.4 billion — a difference of $6 billion. One question would be whether retailers are paying too much for those leased assets. That’s not necessarily the case, but considering the long-term decline in shopping mall traffic, it’s a legitimate point to ponder. If you found a gap like that in a specific retailer, you might want to follow up with questions about foot traffic, TTM sales, and the like.
Calcbench is preparing a more in-depth report looking at a larger set of retailers and ASC 842. That will be out in the next two weeks or so. Stay tuned.