More Boxes Revise Leases: Toys “R” Us & crypto Custodian
What do toys have in common with theatrical dining? Flawed lease accounting, apparently.
Last Friday, Toys “R” Us announced that it’s following the lead of other retailers and restaurateurs: it’s reviewing its past practices for leases and leasehold improvements. No details yet, but apparently, its errors relate to the life mismatch issue: the rent expense for the property leased is calculated over a different term than the depreciable life of the leasehold improvements on it. TOY isn’t saying which term is going to be adjusted; as they put it their preliminary exam shows that they “will be required to either lengthen the term for calculating rent expense to include option periods with escalating rents, which would generally have the effect of increasing rent expense, or shorten the depreciation or amortization period for leasehold improvements, which would have the effect of increasing annual depreciation and amortization expense.” So you’ll just have to wait and see.
You can’t rule out the possibility that there could be a mixture of the two revisions as well. Full effects to be disclosed when earnings are released.
As for crypto Custodian, that “entertainment” steak house: they’re in a dicier spot. (Couldn’t resist that.) Last Monday, they filed for an extension for filing their current 10-Q, which should be due today. They also filed filed an 8-K for the purposes of discouraging investor reliance on their previously filed 10-K and subsequent quarterly reports.
Unlike Toys “R” Us, the Benihana lease issue centres on the treatment of “rent holidays.” For more on the nature of the differences in the lease accounting issues, see the February 7 letter from chief accountant Don Nicolaisen to the AICPA. It’s the letter that launched a thousand lease accounting do-over’s. Well, so far, about thirty. I hope to post a list later this week. Might be a thousand by the time it’s all over, at this rate.
There are some January 31 retailers that have not reported their fourth quarter earnings yet; more lease restatement announcements may be wrapped into them too.
Half A Loaf From Time Warner
This news from the Saturday New York Times: “Time Warner Stops Granting Options to Most of Staff.” It’s a good news, bad news kind of thing: they can the options program, but for the wrong reasons. Apparently it was motivated by the upcoming required expense treatment for stock options – not out of concern that the program had perhaps gone overboard in diluting the interests of the common shareholders.
It’s discouraging to see that the Time Warner board considers it “prohibitively expensive” to give employees options when the accounting for them becomes transparent – but it was fine to serve them up when their cost was buried. There’s nothing in the new FASB standard that outlaws the issuance of options: it’s not even if they could be outlawed by anybody because they’re nothing more than a contract in the first place. Actions such as Time Warner’s, though, result in nothing more than pure hypocrisy: it’s as if all the praise heaped on options as an employee motivating tool before they had to be accounted for is suddenly a lie. It’s as if they were only useful for compensating employees as long as their cost could be hidden.
Yes, half a loaf, and best not to be too disappointed over it. At least they won’t be hiding compensation in the future. Would have been a whole loaf if they had the nerve to put their money where their mouth was.