Tripping the Lease Fantastic

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There's a new game at your local Toys "R" Us (NYSE: TOY) store. It's called Don't Spill the Bean Counters. No? Well, it certainly feels that way since the company announced that it will be restating its last two years of financial reports because of lease accounting issues.

Don't panic. This isn't Enron "R" Us here. Earlier this month the Securities & Exchange Commission sent out accounting warnings to many retailers and restaurateurs over their treatment of landlord incentives. The country's second-largest toy seller isn't alone. In just the past few days, we've seen others such as Panera Bread (Nasdaq: PNRA), Nordstrom (NYSE: JWN), Abercrombie & Fitch (NYSE: ANF), and even Starbucks (Nasdaq: SBUX) agree to tweak their numbers.

What's going on here exactly? Well, luring prized tenants into an empty space often involves the owners agreeing to foot the bill behind some of the leasehold improvements to get the store or eatery ready for business. In the past, many of these companies were simply writing off this perk as a reduction in capital expenditures -- instead of an accrued rent liability. Since the leasehold improvements that the tenant ultimately pays for are usually written off in equal chunks over the life of the lease, we now have some number-mopping to do here.

These items do not affect cash flow, obviously. This is strictly tweaking the amortization and depreciation line items, and, if I lost you somewhere in the third paragraph, grab my hand as I fumble for my butane lighter.

The bottom line is that the moves are no big deal. If you own shares in a retailer or restaurant operator that announces the accounting changes, it should not influence your decision to buy, sell or hold. If anything, it's probably just one more reason to concentrate on cash flow and free cash flow over earnings as a gauge of a company's true financial performance. So can someone pick Geoffrey the Giraffe off the floor now? Toys "R" Us and its odd choice for a mascot have little to worry about -- this time.

Did you know Wal-Mart (NYSE: WMT) was the leading toy seller in the country? How about checking out some of these other related toy industry stories:

• Furby: The Next Generation
• Toy Store Faces a Fork in the Road
• Babies Take Manhattan

Longtime Fool contributor Rick Munarriz has two young sons, so he knows Toys "R" Us all too well. Then again, maybe he will be hitting toy makers with that bean counter game idea soon. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.