The Impact of the New Lease Accounting Standard –
From footnote obscurity, operating leases are poised to become prominent features in SEC corporate filings, thanks to the new lease accounting standard adopted by the Federal Accounting Standards Board (FASB).
Under the new standard, companies will be required to report a right-of-use asset and lease liabilities for each lease as separate line items on the balance sheet. The result will be that an estimated $3 trillion of leases will transfer onto corporate balance sheets as companies adopt the new standards, according to a new report by lease accounting software firm LeaseAccelerator. The study found that collectively, the top 1000 public companies in the U.S. have almost $1 trillion in operating lease liabilities.
In addition to an increase in total assets and liabilities, companies may also experience changes to key financial metrics, including return on assets, asset turnover, and the quick ratio.
Although most companies in every industry have leases, there is a particularly high concentration of leases in the retail, airlines, and telecommunications sectors. The retail industry will experience the greatest proportional balance sheet change from the new standards as specialty, grocery, and food service chains tend to lease many of their brick and mortar store locations.
The new standard will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, it will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.
New Sandbox –An Industry-friendly Place to Play
The acting chief of the Consumer Financial Protection Bureau (CFPB), Mick Mulvaney, announced the creation of a “regulatory sandbox” intended to help Fintech firms develop new products and services. The Bureau’s new innovation office will encourage Fintech companies — those that provide financial services by making use of software and modern technology — to bounce off ideas with regulatory officials. The office is expected to look at cryptocurrencies, blockchain, microlending, non-traditional credit-scouring, and more.
Scheduled to leave the CFPB, Mulvaney will have left his mark. He was already serving in President Trump’s cabinet as the Director of the Office of Management and Budget (OMB), when the president tapped him to also be the acting director of the CFPB. President Trump has nominated OMB staffer Kathy Kraininger to take over, but a rejection by the Senate could extend Mulvaney’s term for months.
Originally proposed in 2007 by then Harvard Law School professor (now U.S. Senator) Elizabeth Warren, the CFPB was created by the Dodd-Frank Act and began operations in 2011. Controversial from its inception, its “independent agency” status has been legally challenged, and it has received consistent criticism from the financial industry for its heavy-handed regulating and powerful autonomy.
Mulvaney entered the position with a more business friendly posture, vowing to stop “regulation by enforcement.” He said: “My goal was to point it [CFPB] in the trajectory of a gold standard regulator — to be spoken of in the same breath and with the same credibility as the SEC and FDIC.” [A comparison, no doubt, to the SEC under Jay Clayton].
The sandbox program will be headed by a former lawyer in the Arizona attorney general’s office, Paul Watkins, who set up the program to attract Fintech companies to Arizona. This deregulatory thrust is part of a four-part series of Treasury Department reports setting out the Trump administration’s financial regulatory agenda.
In addition to the sandbox concept, the report sought regulatory relief to startups; advocated for a national bank charter for Fintech firms; pushed to rescind the payday-lending rule; and backed the relaxation of rules for the resale of loans by nonbank lenders.
States Sue Feds Over SALT Cap
New York, Connecticut, Maryland, and New Jersey have sued the U.S. government in federal court, seeking declaratory and injunctive relief to invalidate the $10,000 limit on state and local tax (SALT) deductions that was enacted as part of the Tax Cuts and Jobs Act, reports the Journal of Accountancy. (New York v. Mnuchin, No. 18-cv-6427 (S.D.N.Y. 7/17/18)
The states will argue that “deducting state and local tax is essential to prevent the federal tax power from interfering with the States’ sovereign authority to make their own choices about whether and how much to invest in their own residents, businesses, infrastructure, and more,” and that the restriction on deductability of state taxes violates the Tenth Amendment and “foundational principles of federalism” because it “deliberately seeks to compel certain States to reduce their public spending.” [Interpretation: We won’t be lowering your state taxes!]
More Businesses Eligible for Cash Method Accounting
Complying with provisions of the Tax Cuts and Jobs Act, the IRS has issued guidance, opening the door for businesses with average annual gross earnings of $25 million or less in the prior three year period to use the cash method of accounting. The tax law expanded the number of small business taxpayers who are eligible to use the cash method, and exempted those businesses from certain accounting rules for inventories, cost capitalization and long-term contracts.
Treasury and IRS Propose Regs for 100% Depreciation Deduction
With the goal of providing incentives for small and midsize businesses to expense equipment purchases and make capital investments in their companies, the tax code overhaul which Congress passed last December increased the first-year depreciation deduction from 50 to 100 percent for qualified property acquired and placed in service after September 27, 2017.
The Treasury and IRS have published proposed regulations to implement this change, and will continue to roll out new regulations and guidance to facilitate the many provisions and changes of the new tax law.
GOOD NEWS / BAD NEWS:
Worker Paychecks Up!
The Wall Street Journal reports that U.S. workers received their biggest pay increases in nearly a decade over the 12 months through June 2018, a sign the strong labor market is boosting wages as employers compete for scarcer workers. It cited the Labor Department’s employment-cost index that rose 2.8% in the first half of 2018.
Worker Paychecks Smaller!
CNBC reports worker paychecks in July actually declined when accounting for inflation. Citing Labor Department figures, average weekly earnings decreased 0.2 percent over the one-month period and increased only fractionally from the same period a year ago. The Consumer Price Index increased 0.2 percent month over month for an annual gain of 2.4 percent, up one-tenth of a percentage point from June, driven primarily by a jump in rental costs.
Home Price Gains!
S&P CoreLogic Case-Shiller’s National Home Price Index rose 6.4%, holding steady from the April rate. Price gains are at this point one of very few strong spots in the housing market, as a lack of inventory is helping to give sellers continued pricing power despite slowing sales. Good news if you are selling.
Home Price Gains Contribute to Housing Slowdown!
“The combination of rising home prices and rising mortgage rates are beginning to affect the housing market,” according to David Blitzer, managing director at S&P Dow Jones Indices. Rising prices are contributing to a slowdown in virtually every other housing-market indicator — from existing home sales to housing starts to pending home sales, which have lagged behind year-ago activity for six straight months, according to the National Association of Realtors and reported by the Wall Street Journal.
Private Sector Adds 219,000 New Jobs!
Representing the largest monthly increase since February, the U.S. private sector added 219,000 jobs in July, according to payroll processor Automatic Data Processing Inc. (ADP). Medium-size businesses (50-499 employees) added 119,000 jobs which was more than small and big businesses combined. Most of the jobs were in the service sector and led by healthcare and social assistance, which added the most, according to ADP.
Manufacturing Activity Slower than Expected!
U.S. manufacturing, though continuing to expand, did so at a slower pace in July than economists expected. According to the industry group Institute for Supply Management, the factor sector fell 2.1 percentage points to 58.1 in July, but any reading above 50 indicates expanding activity. So still good news? Perhaps. Consumer and business spending kept the numbers healthy — but looming trade disputes could quickly change that to bad news.
Yes, We Don’t Take Bitcoin!
When the New York Stock Exchange’s parent Intercontinental Exchange (ICE) announced plans to create a new “global platform and ecosystem for digital assets” called “Bakkt,” it did so alongside a group of big name enterprises including Starbucks and Microsoft.
That’s when a number of mainstream media outlets ran misleading headlines. CNBC’s headline read “New Starbucks partnership with Microsoft allows customers to pay for Frappuccinos with Bitcoin.”
A Starbucks spokesperson clarified in comments to Motherboard that “customers will not be able to pay for Frappuccinos with Bitcoin,” but rather the company is part of a new venture creating a platform, Bakkt, to “convert digital assets like Bitcoin into U.S. dollars, which can be used at Starbucks,” adding, “At the current time, we are announcing the launch of trading and conversion of Bitcoin. However, we will continue to talk with customers and regulators as the space evolves.”
So, for the time being, if you want to purchase a Frappuccino at Starbucks, you’ll just have to do so in the usual way — with lots of U.S. dollars, or a second mortgage on your house.
Computers are useless. They can only give you answers.
Be careful about virtual relationships with artificially intelligent pieces of software.
I changed my password everywhere to ‘incorrect.’ That way when I forget it, it always reminds me, ‘Your password is incorrect.’
A computer once beat me at chess, but it was no match for me at kick boxing.