Last quarter, we exposed a $1.4 billion liability Salesforce (CRM), a cloud software provider, is keeping off-balance sheet. Like others, Salesforce excludes operating leases “not yet commenced” from its balance sheet liabilities. In its latest 10-Q, Salesforce revealed its operating leases not yet commenced increased by $100 million:

“As of July 31, 2021, the Company has additional operating leases that have not yet commenced totaling $1.5 billion and therefore not reflected on the condensed consolidated balance sheets and tables above.”

The not yet commenced leases commence as soon as 2022 and oblige Salesforce with lease payments for as long as 18-years.

We calculate that Salesforce discounts its operating leases by approximately 3%. If we add the hidden $1.5 billion to Salesforce’s future lease liabilities, our analysis reveals the net present value of the company's future operating lease liabilities is approximately $5 billion, not $3.5 billion as Salesforce would prefer investors believe. In other words, Salesforce is understating its future operating lease obligations by 30% and its total liabilities by 4.53%.

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

Though widely used, this treatment appears inconsistent with FASB’s guidance on the topic. If a lease is legally binding— as Salesforce 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)...”