This will surely end ‘well’.
From a practical perspective, operating leases are pretty much the same as debt. They reflect a contractual obligation on the part of one counterparty to make defined stream of cash payments to another over a set period and with an implied interest rate embedded in the payment stream. In fact, within a bankruptcy context operating leases are treated exactly the same as debt and rank pari passu with the other general unsecured obligations of a business. That said, accounting rules treat operating leases differently than debt and do not require them to be included as a liability on a company’s balance sheet. That is, until 2019.
As Bloomberg points out this morning, starting in 2019 new accounting rules, called IFRS 16, will force companies to include operating lease commitments as part of their reported debt obligations. And while the end result will have far-reaching implications, the biggest will be the addition of roughly $3 trillion in debt to corporate balance sheets.
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