How to make sense of the whopping $47 billion in lease liabilities that WeWork disclosed ahead of its planned IPO?

That figure makes WeWork one of the world’s largest lessees, according to Bloomberg data, which is pretty astonishing considering the flexible office space provider was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.

There is, however, a more charitable way to look at that eye-watering bill for future rent: These liabilities will sit on WeWork’s balance sheet so they don’t have to appear on yours. Until recently, so-called operating leases didn’t have to be included on corporate balance sheets but were tucked away in the footnotes to the financial statements, where they languished unread by most people.

That always seemed like a glaring oversight as these commitments can be massive – in total, the world’s publicly traded companies have almost $3 trillion in operating lease obligations, according to Bloomberg data.(1)Plus, paying up isn’t optional – a bit like with money owed to a bank or bondholder. Hence ratings companies and securities analysts have always taken these obligations into consideration when assessing the riskiness of a business.

The accounting rules have now caught up, and companies are now having to start adding the liabilities and a corresponding asset (reflecting the right to use the property) to their balance sheets.(2)

There’s one big exception, though: The new rules still permit leases shorter than one year to remain off the balance sheet. For WeWork and rival IWG Plc, this is potentially a big selling point when talking to clients, albeit one that exploits a loophole in accounting rules.

Lately, both companies have been talked up the potential boost to demand for short-term leases triggered by the change. IWG’s annual report notes that the new accounting standard is “already driving significant increases in demand for our services from enterprises.”

It’s an open question whether an accounting rule change will really provide such a big fillip for these businesses: Auditors are likely to scrutinize short-term lease arrangements more deeply if there’s a likelihood they will be renewed. WeWork also is increasingly targeting large corporate clients that tend to require longer leases than a one-person start-up.

And the downside for both these companies is that they have to take the accounting hit themselves. IWG has been forced to include a 5.5 billion-pound ($6.7 billion) discounted lease liability on its balance sheet, which has boosted its net debt and leverage ratios. Under the old accounting rules, it could claim net debt was about equal to Ebitda. Now it’s four times that amount. (3)

Of course, IWG has been at pains to stress that the rule change won’t impact its cash flow – the lease payments remain the same.

But anyone weighing whether to buy shares in WeWork’s IPO cannot ignore the fact that the company will have to find $47 billion from somewhere in coming years to meet its contractual obligations – including about $10 billion in just the next five years. Right now, its own very negative cash flows won’t cut it.

(1) This refers to companies with a market cap of more than $100 million.

(2) The relevant accounting rule changes are IFRS 16 and ASC 842 for companies that use GAAP. They differ in some respects but both have exclusions for leases shorter than one year.

(3) WeWork’s balance sheet as of June 30 2019 includes around $18 billion of long term operating lease obligations. WeWork arrived at that seemingly low figure by using a high discount rate of 8.2%.

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Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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