Larry Claasen

Industrial Correspondent

ANALYSTS say a change in accounting practice on leasing agreements has distorted the earnings for leading retailers, Woolworths and Massmart.

Andisa Securities retailer analyst Evan Walker said early this week it was an "obstacle for investors trying to judge the pure economic reality of any corporation".

The change sees the retailers accounting for a long-term year lease agreement — including annual rent increases — in the first year of the lease.

This sees Massmart reducing earnings by R54m in the financial year to June — and R51m in the previous financial year.

Woolworths said headline earnings a share would be reduced 2,9c for the financial year to June and 3,1c in the previous financial year.

Walker said the change would have no material effect on cash flows or earnings, but retailers would be forced to structure their lease obligations over shorter periods to smooth earnings more effectively.

The retailers would change their accounting practices in response to a circular issued last week by the South African Institute of Chartered Accountants (Saica).

Saica said that lease payments under an operating lease would be recognised as an expense on a straight-line basis over the term of the lease, except on rare occasions when another systematic basis is more representative of the time pattern of the user’s benefit.

Retailers until now recognised rental expenses on the basis of the cash flows in the operating lease agreements, believing this was more representative than the straight-line basis.

They have now decided to adopt the straight-line basis with immediate effect.

Massmart said the straight-line basis would have a more "material adverse impact" on companies with a newer average lease profile.

It said over time, however, as the average lease profile aged, the changes would reflect positively on earnings.

Massmart and Woolworths plan to release their results for the year at the end of the month. Massmart closed down 2,04% at R48,98 yesterday, while Woolworths shed 1,69% to R11,60.