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https://www.wsj.com/articles/new-lease-accounting-standard-may-mislead-investors-credit-suisse-says-11562800479

CFO JOURNAL

New Lease Accounting Standard May

Mislead Investors, Credit Suisse Says
Report says data-feed errors are potentially having a negative impact on investment decisions

New lease accounting rules have resulted in potentially misleading data feeds,
inconsistent inancial reporting and other discrepancies that could confuse and
misinform investors, Credit Suisse Group analysts said in a report
PHOTO: JEENAH MOON BLOOMBERG NEWS

By Mark Maurer
July 10, 2019 7 14 pm ET

New lease accounting rules have resulted in potentially misleading data feeds,
inconsistent financial reporting and other discrepancies that could confuse and
misinform investors, Credit Suisse Group analysts said in one of the more detailed
industry warnings from an investment bank since the standard took effect for
public companies late last year.

The Financial Accounting Standards Board’s new standard requires companies to

report operating leases as liabilities on the balance sheet, rather than in the
footnotes to the financial statements—as was required by the old rules. This
change can inflate the debt on the balance sheet.

The sheer magnitude of the standard’s impact—trillions of assets and obligations

coming onto corporate balance sheets—could distort traditional metrics found in
popular investor data sources, said Ron Graziano, director of global accounting
and tax at Credit Suisse and one of the authors of the report. Credit Suisse’s HOLT
Group, which released the report, provides quantitative analysis of more than
20,000 companies to enable clients to make better investment decisions.

“Any change of this size can be disruptive,” Mr. Graziano said. “The real problem is
that this impacts [metrics such as] the return on invested capital and leverage,
 and it can cause large distortions in the
market.”
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At issue is whether operating leases are
CFO Journal automatically included in key financial
metrics by data providers, and whether
The Morning Ledger provides daily news and
insights on corporate finance from the CFO investors are aware that their data feeds
Journal team. have made these adjustments, Mr.
Graziano said.

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To comply with the new standard, data vendors have been forced to change how
financial-statement line items such as debt; property, plant and equipment, or
PP&E; and earnings before interest, taxes, depreciation and amortization, or
Ebitda, are presented, according to the report. But without clarity on how the new
standard impacted the calculation of specific metrics by each data vendor,
investors can inadvertently transpose this information into their screens and
financial models without making their own adjustments, leading to distortions.

For example, the report said, some data providers classified newly created
operating lease right-of-use assets as PP&E. Credit Suisse questioned the
economics behind that decision and said it could conflict with how companies
report it on the balance sheet.

The report identified filings from

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Through the Pandemic October 2, 2020 “It’s a cautionary tale on the analytical
impact, which is particularly big in the
retail and transportation industries,
where they have lots of leases but the
balance sheets are not enormous,” said Sandra Peters, head of financial reporting
policy for the CFA Institute, a Charlottesville, Va.-based association that
represents chartered financial analysts.
Given that data analytics have changed under the new standard, investors need to
look beyond financial statement footnotes to grasp the proper disclosures, Ms.
Peters said.

The FASB’s new lease accounting standard will be effective for private companies
for fiscal years beginning after Dec. 15, 2019. The standard became effective for
public companies for fiscal years starting after Dec. 15, 2018.

Write to Mark Maurer at mark.maurer@wsj.com

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