Risk Management

Lease Accounting: Food for Thought

Due to the way they account for leases or leasehold improvements, a number of restaurant companies have restated their financials.
Stephen TaubJanuary 12, 2005

Applebee’s International Inc. announced that it may become the latest restaurant company to restate its results due to the way it accounts for certain leases or leasehold improvements.

The fast-growing company, which is opening a large number of stores in small cities and towns, acknowledged that it leases a substantial number of properties on which significant improvements have been constructed. Applebee’s added that it is currently reviewing its accounting treatment for leases and depreciation of related leasehold improvements in light of restatements related to this practice at other restaurant companies.

Applebee’s expects to complete its review prior to releasing its fourth-quarter and fiscal year 2004 results on February 9. If the company determines that its historical accounting treatment requires modification, it added in a statement, adjustments to financial statements for one or more fiscal years may be required.

The restatements at other restaurant companies, Applebee’s explained, have generally arisen from changes to the accounting for lease-renewal options or rent escalations by requiring the use of the same lease term in determining the operating or capital classification of a lease, rent expense, and depreciable lives of related leasehold improvements. “Based on reports filed by certain other restaurant companies, it appears such restatements generally will reflect increased depreciation and/or rent expense compared to that previously reported,” added the company.

As we reported last month, Orlando-based Darden Restaurants Inc., best-known for its Olive Garden and Red Lobster restaurants, announced that it will restate its financials going back to 1996, adding that it had incorrectly calculated its straight-line rent expense and related deferred rent liability. Other restaurant companies that recently announced plans to restate their financials for similar reasons, according to Dow Jones, include Ruby Tuesday Inc., Brinker International Inc., Jack In The Box Inc., and CKE Restaurants Inc.

KPMG is the outside auditor for all those companies; Applebee’s outside auditor is Deloitte & Touche.