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For accounting you probably want to keep it simple. Accounting should be a baseline sanity check to keep numbers somewhat in line with reality. It's not meant a
by jeffdavis 9y ago
For accounting you probably want to keep it simple. Accounting should be a baseline sanity check to keep numbers somewhat in line with reality. It's not meant as a valuation model.
- jasode 9y ago>It's not meant as a valuation model. That's not my intention. I'm staying within the bounds of plain accounting for the concept of "debt liability". If a company has a 5 year lease of $1000/month rent, I think the new accounting rules says it's a 60x$1000=$60000 "debt". But in my mind, the company really isn't on the hook for all $60k. If the company has an "early termination" or "lease buyout" clause that they can exercise at year 2 with a 6-month notice to the landlord, they are really only in "debt" for 30 months (24+6), not 60. The rest of the 30 months act more like a "call option" than a debt instrument because the company really doesn't have to pay it. I'm not an accountant and just thinking out loud. And to reiterate, this "optionality" math applies more to office space leases than equipment leases like airplanes.
- jeffdavis 9y agoIn general, there are a lot of contract terms that affect your flexibility as a business, and they are often major negotiating points for large deals. Almost any of them could be considered a call/put option. But I don't think the goal of accounting is to expose all of those contract terms to casual investors.
- heos 9y agoIf you ha these terms the debt would be for 30 months. Quite clear from IFRS 16, only the amount which you are contractually obligated to pay is debt.