
$3 Trillion in Forgotten Debt - gscott
https://www.bloomberg.com/gadfly/articles/2017-03-20/say-hello-to-3-trillion-in-forgotten-debt
======
zaroth
If you're accounting for future lease obligations as debt, then I think you
somehow have to account for future exclusive use of the thing you are leasing
as an asset.

It's easy to value the future lease obligation -- monthly payment * remaining
term. But without a way to value the corresponding leasehold this change seems
like it just distorts financials in a way that makes the data less useful.

~~~
teekert
It bothers me that I have Ph.D. yet I understand only about every third word
in your comment and nothing of the whole thing.

~~~
phkahler
My take on the comment: Compare to a family that takes out a loan to buy a
house. If you ask their net-worth it's not just money in the bank, you have to
subtract the debt that they owe. Parent comment was saying that you need to
add the value of the home back in as well. It's a little different with leased
property, but there may be some validity to the comparison. My analogy is not
the same - a family with a mortgage will eventually get rid of that monthly
payment and own the home. A family renting is not going to achieve the same
thing. In the same sense I disagree with the comment - the property leased is
not an asset, but it does have some value or it wouldn't be leased in the
first place.

OTOH the article mentions that for a while companies liked to sell and lease-
back which allowed them to appear to have cash even though the cash didn't
have anything to do with business activities.

~~~
htormey
A lease or rental agreement can be valuable depending on the terms.

An example: my mother managed to significantly negotiate down her commercial
lease after a court case with her landlord.

The price that she now pays is significantly below market rate. It’s also
locked in for the next decade or so. That lease is quite valuable.

The same is true for rent controlled apartments. I have had one in San
Francisco for the last 5 years and pay significantly below market rate.

------
cromwellian
David Stockton's been pounding this for a long time, he pointed out that Toys
R'Us was the first canary to fall. His point is, cheap credit has allowed many
unhealthy businesses to keep sputtering along for a long time without making
changes.

Granted, Stockton is kind of a gold bug, and former Reagan budget director
trickle down fan, but he's reformed on the debt issue and taxes now, and has
been basically predicting an apocalypse once central banks start cleaning up
their balance sheets and tightening interest rates.

~~~
thaumasiotes
> he pointed out that Toys R'Us was the first canary to fall. His point is,
> cheap credit has allowed many unhealthy businesses to keep sputtering along
> for a long time without making changes

That's an odd point to support with Toys R Us? From what I read, a third party
borrowed money to buy the (profitable) Toys R Us. The new, indebted, Toys R Us
is still profitable except for the cost of servicing the debt that, notably,
it didn't choose to take on. Therefore it's going bankrupt and the buyers are
getting wiped out, but the store will be fine because its business is
perfectly healthy - revenues exceed cost of operation.

------
rrggrr
This promises to be a nightmare for small business. By way of a few examples,
a company will need to evaluate whether its right to use tangible personal
property is actually its own property subject to personal property tax, sales
tax and use tax. Generation transfer and businesses sale valuations will be
impacted on a perishable lease "asset" values. There will be disputes about
the differences between Fair Market Value and GAAP value. Even colocation,
SAAS and software leases with terms greater than one year may be impacted by
this rule.

------
redwood
How much will this shift the Capex verse Opex dynamic which typically is
perceived to be one of the many motivating factors towards cloud computing
adoption?

~~~
rrggrr
The cost to own and manage is still greater, but it for terms longer than one
year it will likely raise costs to lessees, and will certainly impact their
balance sheets.

------
heisenbit
This will make debt more attractive for companies that produce something. At
the moment the fact that leases are not visible drives productive companies to
rent equipment instead of renting money. The big beneficiary were GE Capital
and the like that in turn rented the money often at a discount. Leasing
companies will continue to enjoy some economies of scale but have lost a
strategic advantage. Any effect this rule change will have on companies will
show up magnified in the leasing companies.

------
known
[https://en.wikipedia.org/wiki/Hollywood_Accounting](https://en.wikipedia.org/wiki/Hollywood_Accounting)
FTW

------
snowwrestler
As an example of how accounting rules can affect investor perception:

When Apple started selling the iPhone, they recognized the revenue for each
phone over 2 years. They thought they had to do that in order to provide free
software updates.

Within a couple years the accounting rule changed and Apple could report full
revenue from an iPhone sale upfront. Suddenly their GAAP earnings jumped,
which led to a stock jump too.

~~~
jonknee
... They haven't made the change yet:

[https://www.marketwatch.com/story/apple-changes-tune-on-
new-...](https://www.marketwatch.com/story/apple-changes-tune-on-new-revenue-
recognition-rules-2017-07-31)

> “The Company plans to adopt the new revenue standards in its first quarter
> of 2019 utilizing the full retrospective adoption method,”

It won't have much of an impact as the deferred revenue is accounted for and
is not the full price of the phone, but the value of future software updates
($25):

[https://www.sec.gov/Archives/edgar/data/320193/0001193125100...](https://www.sec.gov/Archives/edgar/data/320193/000119312510012091/d10ka.htm)

> For all periods presented, the Company’s estimated selling price for the
> software upgrade right included with each iPhone and Apple TV sold is $25
> and $10, respectively.

------
runeks
In layman’s terms, does this mean that some company a) borrowing money for 10
years to buy machinery, and b) leasing that machinery for the next 10 years,
will be reported equally on its balance sheet?

~~~
heos
More or less. Big difference is that 10 years leasing would still be less
debt/asset than owning (cars being a prime exampel with leasing usually being
for 3 years at a time, obviously a smaller asset/debt than buying the same
car).

------
aisofteng
By the same reasoning, wouldn't employee salaries be a contractual liability?
Though without committed end dates, usually.

~~~
kgwgk
No, because as you said there is no commitment. Pension plans, however,
generate liabilities if underfunded.

------
Torai
Debt is a tool. It can be forgotten or demanded. It's the leverage a few exert
upon the world.

~~~
nunez
Not all debt is created equal.

If you are opening an airline, you need to buy aircraft (amongst many other
things). (Commercial) aircraft are extremely expensive but generate generate
value long after they are acquired. It is a lot cheaper to incur devt by
leasing those planes than it is to buy them outright.

Personal debt is different, in most cases, and is a lot closer to the reality
of your statement. I’m spending about $11,000 for our wedding, all inclusive.
I paid for that with a credit card. I can’t make revenue off of that wedding
outright (though I guess it can become an asset if an epic YouTube video comes
out of it and becomes a viral sensation that survives the test of time), so
that debt isn’t useful. But I made a risk calculation that me paying for
everything upfront and paying for it later is more important than waiting the
_n_ years it would take to save for that wedding and pay everything in cash.
That decision _could_ bite me in the ass in a few years when IT is 100%
automated by ML/AI putting the cloud into the blockchain, but I made that
decision assuming that that wouldn’t happen. :-)

