In its FY 2021 10-K, Accenture (ACN), a management consulting firm, offers investors an incomplete picture of its debt. The company says it has $3.9 billion in operating lease liabilities. This understates Accenture’s true liability since the company doesn’t count leases not yet commenced. The additional liabilities— which are buried in the footnotes— significantly understate the company’s future liabilities:

“As of August 31, 2021, we have entered into leases that have not yet commenced with future lease payments of $282 million that are not reflected in the table above. These leases are primarily related to office real estate and will commence in fiscal 2022 with lease terms of up to 16 years.”

Accenture discounts its operating leases by approximately 3.9%. If we add the hidden $282 million to Accenture’s future lease liabilities, the net present value of the company's future operating lease liabilities is actually $3.64 billion, not $3.44 billion as Accenture would prefer investors believe. In other words, Accenture is understating the NPV of its future operating lease obligations by approximately 5.8% and its total liabilities by 1.2%

Under the loophole, companies can omit from the balance sheet leases that haven’t started as well as corporate offices under construction or build-to-suit arrangements. It’s seemingly inconsistent with FASB’s guidance on the topic which states if a lease is legally binding— as Accenture acknowledges— Topic 842 (ASU 2016-02) makes clear it must be accounted for on the balance sheet:

“A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)...”