Crocs (CROX) is significantly understating its future lease liabilities— and total liabilities— offering investors an incomplete picture of its future financial obligations. In its latest 10-K, the company says it has more than $220.4 million in future undiscounted operating lease liabilities. This understates Crocs’s true liability since the company doesn’t count leases not yet commenced. The additional liabilities— which are buried in the footnotes— significantly understate the company’s future liabilities.

On an undiscounted basis, Crocs’ $83 million in not yet commenced leases are 37.6% of the company’s total future lease obligations and 5.4% of the company’s total liabilities.

Under an accounting loophole, companies can omit from the balance sheet leases that haven’t started as well as corporate offices under construction or build-to-suit arrangements. It’s seemingly inconsistent with FASB’s guidance on the topic which states if a lease is legally binding— as Crocs acknowledges— Topic 842 (ASU 2016-02) makes clear 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)...”

Crocs isn’t the only company using the loophole to make its balance sheet look stronger. We recently documented billions of dollars in future operating lease liabilities being excluded from corporate balance sheets.

Also excluded from Crocs’s future minimum lease payments— even after adding back the $83 million in not yet commenced leases— are certain lease payments tied to retail sales. Though the arrangements reduce fixed costs, they also require the company to forego some of the upside should retail locations perform above expectations:

“Certain of our retail store leases include rental payments based upon a percentage of retail sales in excess of a minimum fixed rental. In some cases, there is no fixed minimum rental and the entire rental payment is based upon a percentage of sales. In addition, certain leases include rental payments adjusted periodically for changes in price level indices.”

Crocs reports these variable lease expenses in Cost of Sales. Of the $98.3 million in total 2021 lease costs, variable lease expense accounted for $32.4 million, or 32.9%.