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It's an interesting objection but I don't see why you'd have to assign a dollar value to it. Yes you might be overall doing well compared to other possible opti

It's an interesting objection but I don't see why you'd have to assign a dollar value to it. Yes you might be overall doing well compared to other possible options but that doesn't change that you're still owing $100k. Perhaps I'm not understanding the objection but it seems like an unfounded one.

toast0 9y ago
You owe $100k, but you also have something of value (worth approximately $100k when the lease was entered, but should be adjusted for transaction costs of subleasing). Over time, your payments reduce the debt (this balances out), but the asset also reduces value, which reduces your overall balance. Adjustments for marketability of the leased property should also be made. If the property isn't marketable, maybe the current asset value is $0, but that's rarely the case.
- abritinthebay 9y ago
  Hmmm... it seems to me to be identical to how home owners have a mortgage and home value as two separate debt vs value measures. But what your describing doesn't happen in they way you're describing for home owners why should it for someone leasing a property?
roenxi 9y ago
No accountant, but here is an explanation: Say I open a sauna in a desert. Probably not going to pay any rent, probably not going to make any money. Under zaroth's suggested way of looking at the situation this something like $0 debt, $0 asset. Say I open a sauna in a luxurious ski resort. Now maybe I have some huge 'debt' of rent * lease lifetime; but I also have a productive asset worth some hopefully large (the right to put the sauna somewhere it will get customers). If we only account for the debt only, we are at some level asserting that opening the sauna in the desert was a better bet because the rent is lower. This is clearly stupid, the rent is half of a transaction where we are claiming value. If the business owner puts the upcoming lease payments on their books as a liability, then to keep the picture clear they should also be adding a productive asset to the books that represents their valuable location. If they are operating a rational business, it is likely that the asset added is equal to or greater than the liability.
- abritinthebay 9y ago
  The productive asset IS accounted for in the income/revenue... surely? If it is not producing revue then it is clearly not productive.
- makmanalp 9y ago
  Well, OK, so this is one of those things that confuses me as a non-accountant. The problem is that you're conflating two things: Debt (as in the amount of money you have to repay) vs something like "value". Why call them the same thing? > If we only account for the debt only, we are at some level asserting that opening the sauna in the desert was a better bet because the rent is lower No no no. This is when you misread "debt" as "value". We're just saying that the desert situation is less debt. The ski resort situation is more debt. You can be in more debt but overall have a more profitable enterprise, right? > If the business owner puts the upcoming lease payments on their books as a liability, then to keep the picture clear they should also be adding a productive asset to the books that represents their valuable location. This again confuses me - the debt is a sure thing. You signed a contract, meaning you have to pay up no matter what. The productive asset is not a sure thing - there's a million ways you could mess up and make less money than you intended. So it is absolutely fair to say that the desert business is low-risk (you're going to lose $0 in the worst case), and the ski resort business is high-risk (you're going to lose a lot more in the worst case). If guessing the future value of productive assets was simple, then investors of all kinds would have a super easy job. So how could we possibly put the productive asset in the books with a straight face? Isn't that borderline fraud? I can make my projections as optimistic or pessimistic as is advantageous to me. Who's to say?
  - rtpg 9y ago
    replace the ski resort with a money printer. That money printer has value, given it can print money. You can also assign a dollar amount to how valuable that money printer is. So you can justifiably stick it on your balance sheet since this is a way you're making money. There's a whole thing in accounting about assigning dollar values to things you own, here it's no different. I would argue that you shouldn't really assign potential revenue from the ski resort, but depending on your circumstances it _could_ make sense. Accounting is a bit arbitrary in the end, since there are multiple logical ways of representing things. In most cases it's impossible to claim that one way of thinking is wrong... at worst you can claim that it doesn't match accepted practice.

toast0 9y ago

You owe $100k, but you also have something of value (worth approximately $100k when the lease was entered, but should be adjusted for transaction costs of subleasing). Over time, your payments reduce the debt (this balances out), but the asset also reduces value, which reduces your overall balance. Adjustments for marketability of the leased property should also be made. If the property isn't marketable, maybe the current asset value is $0, but that's rarely the case.

abritinthebay 9y ago
Hmmm... it seems to me to be identical to how home owners have a mortgage and home value as two separate debt vs value measures. But what your describing doesn't happen in they way you're describing for home owners why should it for someone leasing a property?

roenxi 9y ago

No accountant, but here is an explanation: Say I open a sauna in a desert. Probably not going to pay any rent, probably not going to make any money. Under zaroth's suggested way of looking at the situation this something like $0 debt, $0 asset. Say I open a sauna in a luxurious ski resort. Now maybe I have some huge 'debt' of rent * lease lifetime; but I also have a productive asset worth some hopefully large (the right to put the sauna somewhere it will get customers). If we only account for the debt only, we are at some level asserting that opening the sauna in the desert was a better bet because the rent is lower. This is clearly stupid, the rent is half of a transaction where we are claiming value. If the business owner puts the upcoming lease payments on their books as a liability, then to keep the picture clear they should also be adding a productive asset to the books that represents their valuable location. If they are operating a rational business, it is likely that the asset added is equal to or greater than the liability.

abritinthebay 9y ago
The productive asset IS accounted for in the income/revenue... surely? If it is not producing revue then it is clearly not productive.
makmanalp 9y ago
Well, OK, so this is one of those things that confuses me as a non-accountant. The problem is that you're conflating two things: Debt (as in the amount of money you have to repay) vs something like "value". Why call them the same thing? > If we only account for the debt only, we are at some level asserting that opening the sauna in the desert was a better bet because the rent is lower No no no. This is when you misread "debt" as "value". We're just saying that the desert situation is less debt. The ski resort situation is more debt. You can be in more debt but overall have a more profitable enterprise, right? > If the business owner puts the upcoming lease payments on their books as a liability, then to keep the picture clear they should also be adding a productive asset to the books that represents their valuable location. This again confuses me - the debt is a sure thing. You signed a contract, meaning you have to pay up no matter what. The productive asset is not a sure thing - there's a million ways you could mess up and make less money than you intended. So it is absolutely fair to say that the desert business is low-risk (you're going to lose $0 in the worst case), and the ski resort business is high-risk (you're going to lose a lot more in the worst case). If guessing the future value of productive assets was simple, then investors of all kinds would have a super easy job. So how could we possibly put the productive asset in the books with a straight face? Isn't that borderline fraud? I can make my projections as optimistic or pessimistic as is advantageous to me. Who's to say?
- rtpg 9y ago
  replace the ski resort with a money printer. That money printer has value, given it can print money. You can also assign a dollar amount to how valuable that money printer is. So you can justifiably stick it on your balance sheet since this is a way you're making money. There's a whole thing in accounting about assigning dollar values to things you own, here it's no different. I would argue that you shouldn't really assign potential revenue from the ski resort, but depending on your circumstances it _could_ make sense. Accounting is a bit arbitrary in the end, since there are multiple logical ways of representing things. In most cases it's impossible to claim that one way of thinking is wrong... at worst you can claim that it doesn't match accepted practice.