Microsoft Among First to Give Fuller Picture of Lease Situation
Microsoft’s investors and analysts will be among the first to view the significance and effects of new lease accounting rules that require companies to disclose on their balance sheets the full extent of the leases they carry.
Earlier this year the company announced it would adopt the rules July 1, rather than wait—as many of its competitors are doing—for the 2019 date the leasing rules take effect.
Adopting the rules would add $5 billion of right-of-use assets and lease liabilities for operating leases to the company’s 2016 balance sheet, Microsoft said in its April 10-Q. This is about 5 percent of $85.3 billion in revenue the company earned last year.
In fiscal 2017, right-of-use assets and lease liabilities for operating leases would increase because of its acquisition of LinkedIn Corp. and additional data center leases.
“If Microsoft followed through as they indicated in their 10-Q, these disclosures are required quarterly, so we’re not going to see these numbers until the end of the quarter, or sometime after September 2017,” George Azih, chief executive officer of lease accounting software provider LeaseQuery.com told Bloomberg BNA July 5.
Microsoft is expected to provide an update during its July 20 earnings call about its adoption decision.
Reason for Early Adoption
Some companies are adopting the rules concurrently with the new revenue recognition standard—that becomes effective in 2018—because they view that as more efficient.
“Many companies who are also working on revenue recognition want to be able to communicate with Wall Street and the investor community at once about the impacts of these two accounting changes,” said Michael Keeler, chief executive officer of LeaseAccelerator Inc., a provider of Enterprise Lease Accounting software to global companies like Cummins, Eaton, Tyson Foods, and Salesforce.com.
“So rather than adopting revenue recognition in 2018 and leasing in 2019, they want to adopt them the same time and communicate to the street once and get it behind them, so that’s the main reason,” Keeler told Bloomberg BNA July 5.
Experiences Shaped Microsoft’s Culture
Microsoft is characterized by some analysts as being a software company. It is, however, becoming more known for being an aggressive acquirer, according to Moody’s Investors Service. In addition to its purchase last year of LinkedIn, the company in 2014 bought Mojang, a Swedish-based maker of Minecraft. In 2011, it purchased Skype.
Microsoft is also a player in cloud services. Its primary competitors in the cloud markets include Amazon Web Services and Google, primarily Google’s cloud office services, Gartner analyst Ed Anderson said. In the enterprise space, companies like Oracle and SAP are considered by the firm to be both partners and competitors.
Culturally, Microsoft has been through the refiners fire, analysts said. They have been challenged in the courts on financial reporting, and those experiences have shaped Microsoft’s culture. “Consequently, they tend to be pretty focused and diligent in staying up to date and progressive regarding industry best practices for financial reporting,” Anderson, told Bloomberg BNA.
“Because they’re often challenged, they need to demonstrate their financial position based on reputable standards,” he said.
Microsoft’s adoption of the leasing rules will likely set a precedent that others will follow, practitioners said.
“Microsoft is what is called a ‘Large Accelerated Filer,’ meaning that because it’s a large public company, its financials face a lot of scrutiny,” said Azih. “Other companies are going to say ‘if Microsoft’s auditors were okay with the way Microsoft disclosed their information, we’re going to copy that and we’re going to point to Microsoft’s disclosures, as our template, and because it’s good for Microsoft’s auditors it should be good for us,” he said.
The leasing standard provides what analysts and users have been requesting for years as a way to fully represent a company’s obligations. “I’ve heard analysts in the past say, ‘The first thing we do with a set of financial statements is review the footnotes and conduct a back-of-the-envelope calculation to determine what the recorded leasing liability would be,’” Richard Stuart, a partner in RSM US LLP’s national accounting standards group, told Bloomberg BNA.
Those numbers are likely bigger than SEC projected. “The SEC’s assessment that $1.25 trillion is being left off of balance sheets is from a study on public companies, meaning the total is even higher when you factor in nonpublic organizations,” said Stuart.
Rules Developed Because of Enron
The leases rules—though not directly related—result from events that happened a decade ago: the 2001 Enron, WorldCom, and Arthur Andersen abuses. Companies hid debt in structured vehicles off their balance sheets so that performance appeared better. When the dust settled, investors found their pensions and savings wiped out.
That galvanized regulators into looking at accounting rules that enabled placing items off balance sheets. About a decade ago, the SEC estimated there were some $1.25 trillion in operating leases that aren’t on balance sheets.
Though that issue had nothing to do with leasing, the creation of special purpose entities and off balance sheet hiding of debt got policymakers energized, Ralph Petta, president and chief executive officer of Equipment Leasing and Finance Association, told Bloomberg BNA. “Beginning in 2019, almost all leases will be on balance sheet so investors and other stakeholders won’t look to footnotes to determine whether a company has any leases,” he said.
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