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The Devil Is in the Discount Rate
Friday, November 15, 2019

So there we were, skimming through average discount rates for operating leases among the S&P 500, because (a) we’re nerds who need a life; and (b) you can do that with Calcbench.

Discount rates are important because they help a company to determine the net present value of future lease payments. Those payments are now listed as liabilities on the balance sheet, thanks to the new accounting standard for leases, ASC 842.

When a company sets its discount rate on the high side, that results in a lower NPV for future lease payments, and therefore a smaller number liability reported on the balance sheet. Conversely, a low discount rate results in a higher NPV for future lease payments, and a larger liability on the balance sheet.

So those discount rates are important — and sharp changes to a firm’s discount rate are also important, since that can lead to big changes in liabilities on the firm’s balance sheet. Which can then lead to all sorts of questions about what’s going on.

Which brings us to Dish Network Corp.

As we skimmed over those discount rates for the S&P 500, we came to Dish Network ($DISH) and noticed that its discount rate had dropped, substantially. In the first and second quarters of 2019, Dish disclosed average weighted discount rates of 9.3 and 9.1 percent, respectively.

Then, in the Q3 statement Dish filed on Nov. 7, the average discount rate was 5.1 percent.

That’s a lot. As you can see in Fig. 1, below, other companies lower their discount rates too, but usually by only a few basis points — 3.5 to 3.38 percent, 4.2 to 4.1 percent, or something like that. Dish cut its discount rate by 400 basis points.



What’s up with that? We used our Trace feature on that 5.1 percent number to pull up the underlying disclosure.

There, we found a footnote disclosure that on Sept. 10, Dish took possession of $495 million in satellites and real estate that Dish had been leasing from Echostar — and remember, Echostar sold a chunk of itself to Dish earlier this spring.

This transfer of satellites and real estate is, apparently, part of that transaction. Dish said in its footnote that those leased assets were transferred over to Property, Plant & Equipment. Sure enough, the PPE line item ballooned from $1.89 billion in Q2 to $2.76 billion in Q3, an increase of 45.5 percent. The operating lease assets transfer was part of that balloon.

How does all that relate to the change in the discount rate to 5.1 percent? We’re not sure. One reasonable guess is that the remaining assets Dish still leases (from Echostar or anyone else) have a different market value or different lease structure, and therefore deserve a lower discount rate.

Regardless, the bigger story is that Dish moved around a substantial number of dollars on the balance sheet, shifting operating lease assets into PPE. That led to a subsequent drop in operating lease assets and operating lease liabilities, but the numbers only shifted around.

That’s why data is good, but data and footnote disclosure together is better. With Calcbench, you can get both.


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