Calling all devotees of operating lease assets: Calcbench just published a research note examining the potential impairment of those assets — which, as we say in the note, is no longer potential. It’s happening.
A PDF version of the research note is available to all. We review the changes to accounting rules that have compelled companies to start listing operating leases as assets on the balance sheet; and the rules that guide companies on when to declare an impairment of those assets; and several examples of operating lease impairments reported by actual firms in the last few months.
Of course, impairment of assets is not a new concept — but historically, financial analysts only got their undies in a twist over impairment of goodwill assets. Now that companies are also reporting operating leases as assets, those too can be impaired.
Well, how often might leased assets get impaired? Under what circumstances? Could those impairments lead to a material earnings surprise? Or are impairments more hype than substance, over a company’s long term?
We answer all those questions in the research note.
One good example: Hi-Crush Inc. ($HCR), a mining company that specializes in sand and other aggregates. Business did not go terribly well for Hi-Crush last year, and in Q3 2019 the company declared asset impairments totaling $346.4 million — including a $76.3 million impairment for leased railcars.
That was more than double Hi-Crush’s impairment for goodwill in the same period. So clearly impairment of leased assets can be significant. See Figure 1, below.
Anyway, the research note has several other examples, plus a discussion of the accounting rules that have brought us to this moment. If you need a primer on the issue and how Calcbench can help, give it a read!