By Amanda Iacone, Reporter at Bloomberg Tax | Originally posted on: news.bloombergtax.com
- New lease accounting rules short-change comparability between international and U.S. companies
- Data vendors, companies adjusting the universal metric for lease accounting
The corporate earnings measurement known as EBITDA stormed into popular use during the leverage buyout boom of the 1980s, as investors looked for a measure better than net income to figure out how much cash a company generated, and ultimately whether it could handle its debt.
In the decades since, it evolved into a tool for evaluating everything from credit strength to equity multiples even as it was derided as “earnings before expenses” and came under scrutiny at the Securities and Exchange Commission.
Now, sweeping changes to lease accounting rules instituted this year have delivered a blow to the relevance of earnings before taxes, depreciation and amortization as the metric has been used traditionally. Differences in methods used to calculate it already limited its usefulness, said Robert Schiffman, a Bloomberg Intelligence credit research analyst, “and these accounting issues just make it a little bit more imperfect.”
The new rules for lease accounting required companies to report all long-term leases on their balance sheets for the first time.
The trillions of dollars’ worth of operating leases for airplanes, retail space, and office equipment were long estimated by investors and ratings agencies. But the accounting change triggered a few surprises for investors because, while instituted as a step toward balance sheet honesty, it also impacted earnings for such companies as Ryder System Inc., Duke Realty Corp., and Darden Restaurants Inc.… Read More