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Right On, Target!

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	2/4/2005 8:02 AM
Yesterday Target Corporation discussed two accounting issues with investors in this 8-K filing. First issue: a tightening-up of their lease accounting. Target had gone down the same path as numerous restaurant operators: they'd done a poor job of matching up the rent expense of leased land with the depreciable lives of assets placed upon it. The lives of depreciable assets extended beyond the term they were using to recognize the rent expense for the real estate underneath. That improves earnings because the rent expense doesn't reflect the full anticipated term of the leased property with its attendant escalator clauses for rental rates. It also contains an implicit contradiction: how can you say that you have economic benefits from capital assets situated on property that you have no legal right to use? Target is correctly synchronizing the two moving parts of depreciation on capital assets and rental expense on leased real estate. The firm didn't mention how they became aware of the mismatch, but it's a good bet that their auditors and financial staff read the newspapers and are aware of the other leasing do-overs going on wherever brick-and-mortar companies are active lessees of property. (Hey, if the person in the office next to you suddenly contracted Legionnaire's disease, you might schedule a check-up too, right?) The do-overs have been prevalent in the restaurant business, but are now spreading to other industries like retailers and even technology. [Detour: Another company to make the do-over list, outside of restaurants and retailers, is electrical equipment manufacturer Powell Industries. The press has overlooked this one, given that the firm is on the smallish side. But it counts when looking for non-restaurant firms lease do-overs.] Back on Target. Good news: the firm also announced that they would early-adopt Statement 123(Revised) in 2005, recognizing the cost of compensation paid with stock options before they're required to do so, and restating their past financials to make them fully comparable to future reporting. It's refreshing to see someone taking the high road, given the continued teeth-gnashing and hand-wringing over stock option compensation - evidenced in this article in the Wall Street Journal Online. The group described in the article, FullandFairAccounting.org raises many questions - and not about stock options. Questions like "where does their funding come from?" and "who are the organization's members?" Those questions sort of leap into mind when you notice that their first press release was from Washington, DC - and that their stated purpose is this: "While the primary purpose of the effort will be to develop and highlight alternatives for decision makers in the federal government, the group will also try to persuade Congress, FASB and the SEC that, in order to prevent great harm to companies and investors, more time is needed to get the options issue right," added Baynard. So, another player is added to the anti-expensing team, and the stall strategy is still the way to play the game. No idea who is behind it - the website has a techie-firm kind of look to it, with the home page showing a couple of office types (including a blonde ornament) gesturing excitedly at a laptop screen. Presumably, they are pleased with their wealth growth through options. I don't know. But I wouldn't be surprised if the whole thing was an offshoot of this organization. If they're not working together yet, maybe they could find some synergies together.

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