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Accounting Change Trips Up Retailers

The chief accountant of the Securities and Exchange Commission threw a curve ball at retailers and restaurants, forcing several to change the way they account for real estate leases, and resulting in a flurry of accounting reviews and restatements.

“They're trying to stop landlords from colluding with retailers,” says Alan Vaughn, a partner with Habif, Arogeti & Wynne, business advisors and certified public accountants. “They're trying to prevent retailers from inflating rent expenses.”

The SEC's clarification changed the way public companies must account for rent holidays, tenant improvement allowances and the amortization of leasehold improvements. Retailers affected include Starbucks, McDonald's, Family Dollar, Big Lots, Sears and Lowe's. Before the dust settles, many others are expected to record charges.

The good news: these are non-cash adjustments so they don't affect historical or future cash flows or the timing of payments under the related leases.

“We recognized we did have some inconsistencies out there,” says Robert Niblock, Lowe's chairman, president and chief executive. “We took action to go in and make necessary changes and restate our prior financial statements.”

Lowe's earnings were cut by 2 cents per share in 2004 and 4 cents per share in 2003. Target Corp. took a $65 million non-cash adjustment, sending down earnings 4 cents a share. Sears, Roebuck and Co. adjusted its fourth-quarter earnings to correct an error in construction lease allowances for properties of Sears Canada, which slashed its earnings per share by 10 cents.

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