The company best-known for its Olive Garden and Red Lobster restaurants will restate its financials all the way back to 1996 to correct the way it calculates rent.
Orlando, Florida-based Darden Restaurants Inc. announced that after consulting with its accounting firm, KPMG, the company determined that it had incorrectly calculated its straight-line rent expense and related deferred rent liability.
When accounting for leases with renewal options, Darden stated, the company has historically recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term beginning when actual rent payments began. By contrast, the company depreciated buildings, leasehold improvements, and other long-lived assets on those properties over a period that included both the initial non-cancelable term of the lease and all option periods provided for in the lease (or the useful life of the assets, if shorter).
The restatement will “recognize rent expense on a straight-line basis over the entire lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty,” Darden explained. The lease term will begin on the date when the company became legally obligated for the rent payments, it added.
According to Darden, the restatement will increase the deferred rent liability by roughly $120 million over the entire period. In addition, the deferred income tax liability as of the end of fiscal 2004 will decrease by roughly $46 million, resulting in a $74 million decrease in retained earnings at the end of fiscal 2004.