Happy New Year everyone! In Roman numerals, it’s MMXXVI; the FIFA World Cup returns, co-hosted by the US, Canada, and Mexico – the first time three countries have jointly hosted; it’s the 250th anniversary of American independence (the Semiquincentennial); and, you can get your kicks on Route 66 which turns 100 years old.
I was asked just this morning by a long standing vendor client why Off Balance Sheet is both important and complicated. Well, the first answer is Enron – yup, that Enron filing bankruptcy in 2001 and bringing down the 89 year old Arthur Andersen shortly thereafter since they were convicted of obstruction of justice for shredding documents and forced to surrender its’ CPA licenses. Shortly thereafter the Financial Accounting Standards Board, (FASB), and the International Accounting Standards Board, (IASB), commenced on “Convergence” – and effective in 2019 came FASB: ASC 842 (Leases) – replacing the old ASC 840 supplementing, (some would say supplanting), FASB Statement 13 and IASB: IFRS 16 (Leases) – replaced IAS 17. Whoa…that’s a mouthful of accounting jargon but as Joe Friday said, “just the facts”.
A key outcome, (remember FASB and IASB disagreed on Income Statement and are in agreement on Balance Sheet treatment), was if a lease or other contract has a non-cancellable payment greater than 12 Months, those payments must be capitalized – placed on the balance sheet as an obligation. Why is that important? Well, I don’t know about your bank but Total Debt to EBITDA is a super common ratio in modern US credit agreements, typically ranging from 3.0x to 5.0x depending on the company and industry. So, if your debt under that lease or project financing above pushes you above that ratio, you tripped a covenant and that’s going to make for a sleepless night, week, month or worse! Now I am not here to give you accounting advice – I’m just an old leasing guy – but I am reminding you if you start limiting your ability to borrow, you may limit your ability to grow.
Sure, there are ESAs and PPAs, Blocker Corporations, Service Contracts and more that are too cute by half trying to get around these rules and your good auditor will sort that out for you. But being mindful of the 12 Month rule is a great place to start.
Lastly, I am 100% neutral if your voting record is RED or BLUE. What’s important is you register to and get out and vote! All 435 seats in the House of Representatives will be up for election this November, about 33-34 Senate seats will be contested and 36 states will hold gubernatorial elections. If you want good government, ya gotta vote!