Firms Reassess Accounting for Leases
McDonald’s Corp., Borders Group Inc. and 50 other companies have lopped more than $1.5 billion off their reported pretax earnings since federal regulators urged them in November to review how they accounted for leases of stores and other rental properties, company filings show.
The Securities and Exchange Commission is disputing the accounts of restaurant chains, retailers and others, saying they may have “deviated from standard accounting practices” by not recording rents and write-downs for store improvements evenly over the years of leases. Not following the rules can increase quarterly profit.
“These techniques are a way of managing earnings,” said Dennis Beresford, an accounting professor at University of Georgia in Athens and a former chairman of the Financial Accounting Standards Board, which sets U.S. accounting rules. “What this tends to do is smooth things and reduce quarterly charges.”
At least 58 additional companies, including Toys R Us Inc., are reviewing their accounts to see whether they must restate costs and earnings to meet the 28-year-old rule, known as Statement of Financial Accounting Standards 13, company filings show.
“It is always disturbing when there are restatements such as these, especially when I believe the accounting literature is clear,” said SEC Chief Accountant Donald Nicolaisen.
The SEC began questioning the way some companies book lease-related costs in November when CKE Restaurants Inc., which operates Hardee’s and Carl’s Jr. restaurants, sought a ruling from the agency on its lease accounting. The SEC told CKE to correct its accounting, leading to $43.4 million in additional expenses for rents and store improvements, according to a company filing.
“We’d always done it that way,” CKE Chief Executive Andrew Puzder said. “We’ll do whatever we’re told.”
KPMG, which audits Carpinteria, Calif.-based CKE, discovered the mistakes during a review of internal financial controls. The review stemmed from the Sarbanes-Oxley Act, a 2002 law designed to improve financial reporting after accounting failures at energy trader Enron Corp. and phone company WorldCom Inc. resulted in the two biggest bankruptcies in U.S. history.
On Nov. 7, Nicolaisen sent a letter to the American Institute of Certified Public Accountants outlining the proper accounting treatment for leases and saying that companies should consider restating earnings if they hadn’t followed the rule.
The institute, a professional group based in New York, said it had sent copies of the SEC letter to 2,200 accountants and accounting firms.
