Accounting & Tax

Leases Prompt Pep Boys Restatement

Restaurants and fast-food chains aren't the only companies revising their financials after a closer look at lease accounting.
Stephen TaubFebruary 2, 2005

Pep Boys announced that following a review of lease-related accounting policies, the company will restate its financials for the three-year period ended January 2004 and for the first three quarters of fiscal 2004 to correct its computation of depreciation, straight-line rent expense, and the related deferred-rent liability.

The company will take a charge of 80 cents a share for the nine months ended October 30, and it expects the change to shave another 5 cents a share from annual earnings.

Philadelphia-based Pep Boys has 595 automotive-parts stores and more than 6,000 service bays in 36 states and Puerto Rico. Historically, noted the company, when accounting for leases with renewal options it has depreciated its buildings, leasehold improvements, and other long-lived assets on those properties over a period that included both the initial lease term and all option periods (or the useful life of the assets, if shorter). Pep Boys recorded the rent expense on a straight-line basis over the initial lease term, commencing when actual rent payments began.

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“The company believed, as confirmed by the unqualified opinions expressed by our independent auditors, that it was using accounting practices for leases and related depreciation, as applied consistently over more than a decade, in accordance with GAAP,” the company stated in a press release. Pep Boys added that no relevant leases have been entered into since 2001.

After consulting with its accounting firm, Deloitte & Touche LLP, Pep Boys stated that it will use a consistent lease period — generally, the initial lease term — when calculating depreciation of long-lived assets on leased properties and straight-line rent expense. Straight-line rent expense will begin on the date when the company becomes legally obligated for the rent payments.

The company said that the corrections will result in non-cash adjustments, similar to those recently announced by several restaurant and retail companies, and will not have any impact on previously reported cash flows, cash balances, sales, or comparable sales; timing or amount of any actual lease payment or tax liability; compliance with any financial covenant under its revolving credit facility or other debt instruments; or the current economic value of the company’s leaseholds or the underlying value of its real estate assets.

Recently has chronicled a wave of restatements by restaurant chains that have re-examined their treatments lease-accounting issues. Those companies include Applebee’s International Inc., Darden Restaurants Inc., Ruby Tuesday Inc., Brinker International Inc., Jack In The Box Inc., and CKE Restaurants Inc.

Late Tuesday, CEC Entertainment Inc. — which operates the Chuck E. Cheese restaurant chain — announced that it will restate its financials, “Like many other publicly traded restaurant companies,” stated CEC, the company is changing “our prior interpretation of generally accepted accounting principles applicable to certain leases or leasehold improvements.” The review, which includes consultations with the company’s independent auditors and audit committee, is still under way.

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