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Strategies & Market Trends : Value Investing
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To: Bob Rudd who wrote (13855)2/4/2002 12:13:35 PM
From: TimbaBear  Read Replies (2) of 78751
 
Regarding operating leases....some of my thoughts:

If I first view this situation from a personal financial planning paradigm, how would I account for rent in my equations? If I were on a month-to-month lease instead of a multi-year lease would it make any difference from an analysis of my finances? Would the difference it make be significant in understanding my cash flow?

I think that the lease amount in this situation would go against current liabilities but I would not count anything against long-term liabilities, unless the purpose of the accounting was for bankruptcy filing (in which case there would be more long-term liability in a longer term lease).

Taking the personal perspective to the business paradigm, similar thinking applies. If I am attempting to arrive at a total liabilities number in a bankruptcy situation, then I would factor in the long term leases(although the total amount may be discounted somewhat under the presumption that a portion of the obligation would be discharged), in all other scenarios I would only count the current portion.

My rationale is that the lease is just a method of standardizing the rate and term of the monthly or yearly rental situation. It serves to benefit both lessee and landlord. If I would only count a yearly lease against current obligations, why would I treat a multi-year agreement any differently?

I'm at work, so admittedly I haven't thought through this response as much as perhaps I would have over the weekend, but I think this is the essence of my position. I am always willing to modify the positions however if another, clearer method of thinking is presented.

Timba
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