Over the past few weeks I’ve been writing about the huge benefits investors can get from studying a company’s financial statements. This week I want to focus on one of the biggest changes to impact financial statements for some time: the appearance of rented – or leased – assets and liabilities on a company’s balance sheet.
For many years, one of the most underappreciated and important bits of accounting was related to the treatment of operating leases or rented assets. Companies in industries such as retailing, airlines, telecoms, oil and transportation have a tendency to rent rather than own a large chunk of their assets.
These assets and promises to pay for them in the future were kept off a company’s balance sheet. Accountants had long argued about who ultimately bore the risks and rewards of the ownership of the assets concerned. Was it the renter or lessee or the owner or lessor? Whoever it was, the assets and the liabilities that went with these risks and rewards were to go on to its balance sheet.