It bothers me that I have Ph.D. yet I understand only about every third word in your comment and nothing of the whole thing.
Apparently (according to the article; I'm not an expert on this) that $100,000 obligation does not appear on the balance sheet. The new IFRS 16 rule means that it will; so companies will now have a lot more debt. Grandparent commenter was asking "how do you assign a dollar value to the exclusive-use value of that lease" - for example maybe the neighborhood where your shop is suddenly became really popular, so you're locked into a below-market rent for the next 8 years.
Perhaps I'm not understanding the objection but it seems like an unfounded one.
If the property isn't marketable, maybe the current asset value is $0, but that's rarely the case.
But what your describing doesn't happen in they way you're describing for home owners why should it for someone leasing a property?
Say I open a sauna in a desert. Probably not going to pay any rent, probably not going to make any money. Under zaroth's suggested way of looking at the situation this something like $0 debt, $0 asset.
Say I open a sauna in a luxurious ski resort. Now maybe I have some huge 'debt' of rent * lease lifetime; but I also have a productive asset worth some hopefully large (the right to put the sauna somewhere it will get customers).
If we only account for the debt only, we are at some level asserting that opening the sauna in the desert was a better bet because the rent is lower. This is clearly stupid, the rent is half of a transaction where we are claiming value.
If the business owner puts the upcoming lease payments on their books as a liability, then to keep the picture clear they should also be adding a productive asset to the books that represents their valuable location. If they are operating a rational business, it is likely that the asset added is equal to or greater than the liability.
If it is not producing revue then it is clearly not productive.
> If we only account for the debt only, we are at some level asserting that opening the sauna in the desert was a better bet because the rent is lower
No no no. This is when you misread "debt" as "value". We're just saying that the desert situation is less debt. The ski resort situation is more debt. You can be in more debt but overall have a more profitable enterprise, right?
> If the business owner puts the upcoming lease payments on their books as a liability, then to keep the picture clear they should also be adding a productive asset to the books that represents their valuable location.
This again confuses me - the debt is a sure thing. You signed a contract, meaning you have to pay up no matter what. The productive asset is not a sure thing - there's a million ways you could mess up and make less money than you intended. So it is absolutely fair to say that the desert business is low-risk (you're going to lose $0 in the worst case), and the ski resort business is high-risk (you're going to lose a lot more in the worst case).
If guessing the future value of productive assets was simple, then investors of all kinds would have a super easy job. So how could we possibly put the productive asset in the books with a straight face? Isn't that borderline fraud? I can make my projections as optimistic or pessimistic as is advantageous to me. Who's to say?
You can also assign a dollar amount to how valuable that money printer is. So you can justifiably stick it on your balance sheet since this is a way you're making money.
There's a whole thing in accounting about assigning dollar values to things you own, here it's no different. I would argue that you shouldn't really assign potential revenue from the ski resort, but depending on your circumstances it _could_ make sense.
Accounting is a bit arbitrary in the end, since there are multiple logical ways of representing things. In most cases it's impossible to claim that one way of thinking is wrong... at worst you can claim that it doesn't match accepted practice.
> You can be in more debt but overall have a more profitable enterprise, right?
Yes. But if the businesses are identical in every way (management, worker skill, etc, etc) then they should have identical earning potential. If they are different in a way that is profitable, that difference is an accounting asset.
It doesn't matter how similar the hypothetical sauna in the desert is to the profitable sauna, the better location will result in better profits.
> This again confuses me - the debt is a sure thing. You signed a contract, meaning you have to pay up no matter what.
No. Nothing about the future is certain. I don't even mean that in the pedantic philosophical way, it is a very practical concern. If, eg, my fictional ski resort was buried in an avalanche that the rent would be extinguished (in sane jurisdictions, anyhow). The business might also be limited liability and go bankrupt - same $0 loss worst case as the desert.
> there's a million ways you could mess up and make less money than you intended.
That is true of any asset. Risk is an accepted concept. Even 'risk free' assets are only risk free assuming the law doesn't change.
> If guessing the future value of productive assets was simple, then investors of all kinds would have a super easy job. So how could we possibly put the productive asset in the books with a straight face?
Because 'we' think it has value. It passes the 'someone with money is paying for it' test. Guessing values isn't easy, but at some point we do have to do it to compare options.
> Isn't that borderline fraud?
I'm not going to try and lawyer and account at the same time, but accounts books aren't some magical tome that is always right. Sometimes erroneous valuations make it into them. The accountants do the best they can.
There are no set of accounts so correct they can make things true. There are reasonable and unreasonable assumptions. "I think this lease is net-positive for equity" can be a reasonable assumption. In fact, it usually will be.
Lease accounting guidance is very complex and there are many nuances that cover concerns in this thread. The point of the guidance is to determine the fair value.
OTOH the article mentions that for a while companies liked to sell and lease-back which allowed them to appear to have cash even though the cash didn't have anything to do with business activities.
An example: my mother managed to significantly negotiate down her commercial lease after a court case with her landlord.
The price that she now pays is significantly below market rate. It’s also locked in for the next decade or so. That lease is quite valuable.
The same is true for rent controlled apartments. I have had one in San Francisco for the last 5 years and pay significantly below market rate.
I am also confused as to what having a Ph.D. has to do with your ability to understand concepts in what I am assuming is a completely unrelated field?
A Ph.D. signifies advanced knowledge in a particular subject, not a generalized superior ability to understand unrelated concepts.
Fwiw all you need is an ability to google. You can find google at https://google.com.