Risk Management

Lease Accounting Spurs Restatement

Emeritus International, an assisted-living company, will revise its financials largely as result of issues related to operating leases. Separately,...
Stephen TaubJanuary 31, 2005

An assisted-living company’s announcement that it will restate previous results has focused attention on complex lease-accounting rules for other companies within its industry and elsewhere.

Emeritus Assisted Living, which provides assisted-living and related services to senior citizens, filed revised financials for the first two quarters of 2004 and delayed results for the third-quarter as a result of the accounting issues.

The company said it made the following major accounting changes:

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• Certain leases accounted for previously as operating leases will be accounted for as capital leases.

• The accounting for certain operating leases with rent escalators will be changed to accrue total rent expense on a straight-line basis over the lease term, rather than recording actual rent paid under these leases.

• A transaction that was accounted for as a sale-leaseback will instead be treated as a financing.

The company said it currently has 65 communities accounted for under capital-lease accounting, 15 leased communities under finance accounting, and 75 communities under operating lease accounting.

Under new accounting treatments for capital leases, financing leases and straight-line rent, property-related expense (consisting of depreciation and amortization, facility lease expense, and interest) reported in the company’s operating statement for the affected leases would generally be greater than actual lease payments made by the company in the early years of those leases and lower than actual lease payments in later years, Emeritus pointed out.

The application of those accounting rules doesn’t affect the revenues or non-property-related expenses of the communities themselves, nor the company’s consolidated cash flow, according to the company.

The effects of lease-accounting rules, of course, haven’t been limited to the assisted-living business. They’ve also recently spawned a bevy of restatements in the restaurant industry.

Late last week, for example, Wendy’s International became the latest restaurant concern to change its accounting for leases and leasehold improvements. After discussions with its external auditors and its audit committee, the fast-food chain reported that it plans to change its accounting for certain leases.

It explained that the main effects would be to accelerate the recognition of rent expense under certain operating leases that include renewal options with rent escalation and to record some transactions as capital leases.

Wendy’s stressed that the change in accounting treatment isn’t expected to have a material effect on the company’s financial condition and would not affect the company’s cash flows or the timing or amount of lease payments.

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