Under the current accounting treatment for leases, if a lease meets certain characteristics, it is classified as an operating lease and only the lease payments are shown in the financial statements in the income statement; there is no liability recognized for the lease obligation. In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842) which deals with leases. For many companies, this new accounting guidance means that they will have to book both an asset (the right to use the property or other leased asset) and a liability (the obligation to make payments over a contract period.) The new lease accounting standard goes into effect for public companies in 2019.

Walgreens Boots Alliance, Inc., (NASDAQ: WBA), is estimated to be hit the hardest (compared to all publicly-held companies in the U.S.) by this new accounting standard. Walgreens has over $30 billion in operating lease obligations; estimates of how much Walgreens will have to include on its balance sheet range from $18.2 billion to $33.7 billion. As of August 31, 2016 (Walgreen’s fiscal year end), Walgreens had total assets of $72.7 billion and total liabilities of $25.4 billion.

Questions

1. Why do you think FASB revised this lease standard? Assume that Walgreens puts the total amount of its leases into a long-term lease asset on its balance sheet and the offsetting credit is partial to a short-term liability (for lease payments due in the next year) and the remainder to a long-term liability.

2. What will be the likely impact on Walgreen’s return on assets (increase, decrease, or no effect)? Explain.

3. Again, assume the lease amount is booked as a debit to a long-term asset, and the credits to both a short-term liability and a long-term liability. What will be the likely impact on Walgreen’s current ratio (increase, decrease, or no effect)? Explain.

4. Is the impact of the new lease accounting standard going to be material for Walgreens? How do you know?

Answer rating: 100% (QA)

1 The FASB revised this lease standard in order to provide more transparency and comparability in fi... View the full answer