DoorDash (DASH), a restaurant delivery platform, is reaping the rewards from an accounting policy change that allows it to recognize gift card revenue it hadn’t previously. DoorDash now claims to have enough historical data to estimate the portion of outstanding gift cards that will never be redeemed, or what it calls breakage.

The breakage is now recognized as revenue.

In the quarter the policy change was announced, breakage added 2.9% to DoorDash’s revenue and accounted for approximately one third of the consensus beat. In its latest 10-K, DoorDash quantified the impact breakage had on full year 2021 sales:

“As a result of this change in estimate, we recorded $48 million of gift card breakage revenue during the year ended December 31, 2021.”

The change accounted for approximately 0.98% of Doordash’s 2021 sales.

Separately, DoorDash also understates its lease liabilities by $139.8 million. The company discounts operating leases by 8.06%, an 18.3% increase from the previous year. This rate is significantly higher than DoorDash’s restaurant delivery peers which report the following discount rates in recent filings:

-Uber: 7%
-GrubHub (before acquisition): 5%
-Lyft: 6.3%
-Domino’s Pizza (DoorDash lists as competitor): 3.5%

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

DoorDash has $592 million in future operating lease obligations. The present value of those obligations, according to DoorDash, is $399 million. If we use the blended average discount rate for DoorDash’s peer group— 5.45%— we calculate a lease liability of $447.6 million. It means DoorDash is understating the present value of its lease liabilities by approximately $48.6 million, or 10.85%.

It’s the equivalent of 2.24% of total liabilities.

Inflating the discount rate used isn’t the only way DoorDash is distorting liabilities.

DoorDash also excludes leases “not yet commenced” from its balance sheet. In the latest annual report, DoorDash quantified “not yet commenced” leases in a footnote:

“As of December 31, 2020 and 2021, the Company had entered into long term non-cancelable real estate lease contracts of $120 million and $19 million, respectively, for which leases have not yet commenced. Such leases are not included in the operating lease ROU assets and operating lease liabilities on the consolidated balance sheets.”

If we include “not yet commenced” leases in our calculation— spread evenly over the last 5-years of a 10-year remaining lease term— we calculate a lease liability of $538.8 million. It means DoorDash is actually understating the present value of its lease liabilities by approximately $139.8 million, or 35%.

It’s the equivalent of 6.48% of 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 DoorDash 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)...”

DoorDash 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.

Lastly, we note CEO Tony Xu’s potential $3.5 billion payout hinges entirely on DoorDash’s stock price. Regardless of how aggressive you believe DoorDash’s accounting policies, we note CEO Tony Xu’s CEO Performance Award is based solely on DoorDash’s share price, rather than return on invested capital (ROIC), the primary driver of shareholder value.

The CEO Performance Award is comprised of nine tranches of restricted stock units (RSUs) that are eligible to vest based on the achievement of stock price goals, ranging from $187.60 to $501.00 per share. If we assume the fair value of the RSUs is $39.82 as DoorDash states, we calculate the value of the potential payout is $3.5 billion.

Thus far, in 2020 and 2021, Xu has received approximately $124 million related to the CEO Performance Award. With shares down by about a third this year and trading near $100, investors should not be surprised to see additional accounting treatments aimed at flattering the stock price.