Unless you’re an accountant or an experienced and well-read investor, chances are you either haven’t heard of capitalising lease obligations or, if you have, it’s something you don’t do because it can be a lot of work.
Until recently I fell into the second group. I knew what lease capitalisation was (don’t worry if you don’t; I shall explain all shortly) but I didn’t do it because a) none of my investments had problems with crippling lease obligations and b) it was a lot of work.
However, the argument (or excuse) that it’s all too much work is about to become null and void, thanks to a new accounting standard known as IFRS 16: Leases.
This new standard is about to shine a great deal of sunlight onto what was previously a dark and largely hidden debt, so now seemed like a good time to review the basics of lease obligations and how much of what is generally a good thing can be too much.
After much pondering, frowning and chin-scratching I came to the (long overdue) conclusion that lease obligations are basically the same as debt obligations.
You can learn a bit about lease obligations and how I’m going to factor them into my investment process in this month’s Master Investor magazine (below).
I’ve also included Burberry, The Restaurant Group, Next (all of which I own) and Marks & Spencer (which I don’t own) as examples of how the hidden debt of lease obligations can seriously distort the accounts of retailers and other property-based businesses.
Continue reading “The hidden debt of lease obligations”