In its 2020 10-K, Bed Bath & Beyond (BBBY) disclosed it discounts operating leases by 6.4%. This rate is significantly higher than BBBY’s omnichannel retail peers, which report the following discount rates in their most recent filings:

-Target: 3.54%
-Walmart: 6.1%
-Costco: 2.23%
-Home Depot: 3.1%

Using an inflated discount rate hide’s a firm’s true liabilities from investors.

Bed Bath & Beyond has $2.33 billion in future operating lease obligations. The present value of those obligations, according to BBBY, is $1.86 billion. If we use the blended average discount rate for BBBY’s peer group— 3.74%— we calculate a lease liability of $2.05 billion. It means Bed Bath & Beyond is understating the present value of its lease liabilities by approximately $182.1 million, or 7.8% of its future operating lease obligations and 3.5% of total liabilities.

The discount rate is also inflated when compared to BBBY’s debt financing. The interest rates on Bed Bath & Beyond’s 2024, 2034, 2044 senior unsecured notes are 3.749%, 4.915%, and 5.165%.

The company’s understated lease liability is even more pronounced than it looks. In the footnotes, Bed Bath & Beyond reveals it’s excluding from its balance sheet an additional $7 million in future minimum lease payments:

“As of February 27, 2021, we have entered leases which have not yet commenced for two new or relocated locations planned for opening in fiscal 2021, for which aggregate minimum rental payments over the term of the leases are approximately $7.7 million. Such amounts are included in the table above, but have not been recorded in the consolidated balance sheet as of February 27, 2021.”

Excluding “not yet commenced” leases from the balance sheet is an accounting loophole Bed Bath & Beyond and others are using to hide billions of dollars of liabilities from investors.

This treatment appears inconsistent with FASB’s guidance on the topic. If a lease is legally binding— as Bed Bath & Beyond acknowledges— Topic 842 (ASU 2016-02) makes clear that it must be accounted for on the balance sheet:

“A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)...”