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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Mar 16

Written by: Jack Ciesielski
3/16/2005 8:53 PM 

Yesterday, tiny (market : $210 million) Heritage Commerce Corporation filed a non-reliance 8-K for a number of reasons. One, it had accounted for owned equipment on lease incorrectly: it had followed sales-type lease accounting, where it should have treated the equipment as still being owned and handled as an operating lease. That alone makes it unusual in the current lease accounting restatement spasm - but there's a little more.

Aside from an improperly recorded investment in low-income housing, Heritage also accounted for its leased facilities improperly. The bugaboo for them was the treatment of rent holidays. Nothing unusual there, and the press release didn't mention the nature of the leased facilities - but given that Heritage is a bank, it's a pretty good bet that "leased facilities" = "branches."

Bankers sometimes refer to their branches as "stores" - so it's not a surprise to see leasing errors pop up in the banking industry. So far, this is the isolated exception - but if so many companies have it wrong in a handful of industries, it should not be surprising to see it occur in other industries. We'll be keeping close watch to see if any other banks follow Heritage Commerce's lead.