Accounting Observer > Public Blog - A "Cingular" Lease Restatement

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A "Cingular" Lease Restatement - So Far

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	2/25/2005 8:06 AM
One of the odder lease restatements surfaced today: Cingular Wireless announced that they were going down the lease restatement path trod by so many retailers and restaurant firms. The financials from 2000 to 2003, and the interim financials for the first nine months of 2004 will be corrected. The cumulative pretax earnings tab: $171 million, mostly for the pre-2004 periods, and mostly related to rental expense. You're probably thinking the same thing I did when I first heard it: "Must be the operating leases on their storefronts." Guess again. Cingular's lease issue related to its cell sites - which indicates that the lease restatements are spreading beyond the restaurant and retail industries. Obviously, those two industries are the most likely to have exposure to operating leases, but the Cingular restatement is a reminder that storefronts aren't the only assets firms might lease - and that the lease treatment can be wrong in other industries and for other assets as well. And also, to my surprise: Cingular isn't the first to have cell site leases wrong. (It's just the first one I noticed.) There have been a couple others in recent weeks: Ubiquitel from two weeks ago, and Crown Castle International last week. There's no exemption for bad lease accounting just because a firm is not a retailer or restaurant. I don't think that this will be the last lease restatement we'll see outside of those two industries. (More about this posted here.) Getting back to details: Cingular's lease errors revolved around the life chosen for recognizing rental expense. Apparently, they'd chosen the initial term of the lease as the period over which they recognized their rental expense, when in fact they should have taken into account the renewal periods as well - with their attendant rent escalations. Figuring those escalations into the total rent pot and straight-lining it over the entire period gives a higher rent expense than was recognized in the initial lease term years. There were also issues tied to the useful lives of leasehold improvements. Aside from the February 7 letter from the SEC, there was another possible provocation for Cingular's restatement: its network infrastructure venture with T-Mobile USA, Inc., accounted for under the equity method, decided to correct its previously reported operating leases and useful lives.

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