Looks like "whipping boy" UP is at the post again - this time for accounting practices regarding their new HQ building in Omaha. Contained within an article appearing in yesterday's Wall Street Joiurnal is the following relevant "brief passage":
Despite a Post-Enron Push, Companies Can Still Keep Big Debts Off Balance Sheets
This summer, Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Neb. The railroad operator is the owner of the city's largest building, the Union Pacific Center, in virtually every respect except its accounting.
Under an initial operating lease, Union Pacific guaranteed 89.9% of all construction costs through the building's completion date. After completing the building, the company signed a new operating lease, which guarantees 85% of the building's costs. Unlike most operating leases, both were "synthetic" leases, which allow the company to take income-tax deductions for interest and depreciation while maintaining complete operational control. A Union Pacific spokesman declined to comment.
Neither lease has appeared on the balance sheet. Instead, they have stayed in the footnotes, resulting in lower reported assets and liabilities. On its balance sheet, Union Pacific shows about $8 billion of debt, while its footnotes show about $3 billion of operating-lease commitments, including for railroad engines and other equipment.....
Having practiced as a CPA for 21 years until my retirement last year, be assured any underlying teaching I had says you focus on the substance of a transaction, and not on the form. The Profession's rule making group, the Financial Accounting Standards Board, or FASB, has made several pronouncements in the area of Balance Sheet treatment of leases. The first pronouncement focused upon a leased asset's percentage of useful life the leesee has committed to. If over 75%, then inclusion was required. The more recent pronouncement focused upon the present value of the lease payments vs the present (presumably cost) value of the asset and decided if the former was 90% of the latter, Balance Sheet inclusion is required.
Note UP's "fixation" first on 89.9% and later 85%.
The reason any publicly traded company would wish to hold a lease transaction off the balance is that measurement of Return on Investment (Income/Total Invested Capital) and Return on Equity(Income/Stockhoplders Equity) will be more favorable if the lease were excluded. It will not affect Earnings Per Share (Income/Shares outstanding), but a greater ROI will of course enhance share's Market price to the extent current yield is a factor.
Footnote disclosure is required for any off Balance Sheet transactions, and UP's Annual Report has such (cannot paste from PDF format). However, if everyone read the footnotes, the Enron acandal would have never come to pass.
Should you have access to the Journal's subscription site and the interest, here is the complete article
Despite a Post-Enron Push, Companies Can Still Keep Big Debts Off Balance Sheets
This summer, Union Pacific Corp. opened its new 19-story, $260 million headquarters in Omaha, Neb. The railroad operator is the owner of the city's largest building, the Union Pacific Center, in virtually every respect except its accounting.
Under an initial operating lease, Union Pacific guaranteed 89.9% of all construction costs through the building's completion date. After completing the building, the company signed a new operating lease, which guarantees 85% of the building's costs. Unlike most operating leases, both were "synthetic" leases, which allow the company to take income-tax deductions for interest and depreciation while maintaining complete operational control. A Union Pacific spokesman declined to comment.
Neither lease has appeared on the balance sheet. Instead, they have stayed in the footnotes, resulting in lower reported assets and liabilities. On its balance sheet, Union Pacific shows about $8 billion of debt, while its footnotes show about $3 billion of operating-lease commitments, including for railroad engines and other equipment.....
Having practiced as a CPA for 21 years until my retirement last year, be assured any underlying teaching I had says you focus on the substance of a transaction, and not on the form. The Profession's rule making group, the Financial Accounting Standards Board, or FASB, has made several pronouncements in the area of Balance Sheet treatment of leases. The first pronouncement focused upon a leased asset's percentage of useful life the leesee has committed to. If over 75%, then inclusion was required. The more recent pronouncement focused upon the present value of the lease payments vs the present (presumably cost) value of the asset and decided if the former was 90% of the latter, Balance Sheet inclusion is required.
Note UP's "fixation" first on 89.9% and later 85%.
The reason any publicly traded company would wish to hold a lease transaction off the balance is that measurement of Return on Investment (Income/Total Invested Capital) and Return on Equity(Income/Stockhoplders Equity) will be more favorable if the lease were excluded. It will not affect Earnings Per Share (Income/Shares outstanding), but a greater ROI will of course enhance share's Market price to the extent current yield is a factor.
Footnote disclosure is required for any off Balance Sheet transactions, and UP's Annual Report has such (cannot paste from PDF format). However, if everyone read the footnotes, the Enron acandal would have never come to pass.
Should you have access to the Journal's subscription site and the interest, here is the complete article
