A raft of local companies, including Cheesecake Factory Inc., Worldwide Restaurant Concepts Inc. and California Pizza Kitchen Inc., announced that they would have to delay and possibly restate earnings as a result of an SEC clarification on how to account for the financial value of their leases.

A seemingly arcane notation by the Securities and Exchange Commission has created a bit of uncertainty from investors about the financial condition of their companies not helped by the past few years of accounting scandals that have involved restated earnings.

This time, the restatements likely involve not fraud but the more mundane matters of depreciation and amortization. They are generally expected to have only a limited effect on the bottom line.

Basically, the issue involves two practices: companies that hadn't recorded rent payments during periods in which they were receiving either reduced or free leases; and companies that stretched out amortization and depreciation beyond the lease itself.

"(The SEC) wants you to spread it over a period that is realistic and not a pie in the sky," said Robert Boragno, director of accounting and auditing at Shea Labagh Dobberstein, an accounting firm in San Francisco.

As of last week, roughly 150 companies nationwide were facing lease accounting problems of some sort. Most impacted are retail and restaurant businesses that tend to have a lot of leases. Also hit are companies that own considerable amounts of store space, including Santa Monica-based Macerich Co., which announced it was delaying earnings to review its accounting practices.

None of the local companies contacted would comment on the situation.
Interpreting lease rules has been a matter of increased discussion within the accounting community. Finally, SEC Chief Accountant Donald T. Nicolaisen clarified matters in a notification last month to the American Institute of Certified Public Accountants.

The clarification comes as more attention gets paid to financial books in general, particularly with the Sarbanes-Oxley legislation requiring better controls.

*The full version of this story will be available in the March 20 edition of the Los Angeles Business Journal.

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