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Home Depot Excludes $1.3 Billion Liability From Its Balance Sheet
Home improvement chain is understating its future lease obligations by 15.6%.
April 8, 2022
Home Depot (HD) is understating its future lease liabilities, offering investors an incomplete picture of its financial obligations. In its latest 10-K, Home Depot says it has more than $7 billion in future undiscounted operating lease liabilities. This understates Home Depot’s true liability since the company doesn’t count leases not yet commenced. The exclusion is buried in the footnotes and states:
“We have excluded approximately $1.3 billion of leases (undiscounted basis) that have not yet commenced.”
On an undiscounted basis, Home Depot’s $1.3 billion in not yet commenced leases are 18.3% of the company’s total future lease obligations and 1.7% of total liabilities.
The leases commence this year and in 2023.
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 Home Depot 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)...”
Related: LOW, MAS, PPG, SHW, SWK
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