How will Walgreen’s leases impact its financial position under the new FASB lease standard?

Photo of the exterior of a Walgreens storeUnder the current accounting treatment for leases, if a lease meets certain characteristics, it is classified as an operating lease and only the lease payments are shown in the financial statements in the income statement; there is no liability recognized for the lease obligation. In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842) which deals with leases. For many companies, this new accounting guidance means that they will have to book both an asset (the right to use the property or other leased asset) and a liability (the obligation to make payments over a contract period.) The new lease accounting standard goes into effect for public companies in 2019.

Walgreens Boots Alliance, Inc., (NASDAQ: WBA), is estimated to be hit the hardest (compared to all publicly-held companies in the U.S.) by this new accounting standard. Walgreens has over $30 billion in operating lease obligations; estimates of how much Walgreens will have to include on its balance sheet range from $18.2 billion to $33.7 billion. As of August 31, 2016 (Walgreen’s fiscal year end), Walgreens had total assets of $72.7 billion and total liabilities of $25.4 billion.


  1. Why do you think FASB revised this lease standard?
  2. Assume that Walgreens puts the total amount of its leases into a long-term lease asset on its balance sheet and the offsetting credit is partially to a short-term liability (for lease payments due in the next year) and the remainder to a long-term liability. What will be the likely impact on Walgreen’s return on assets (increase, decrease, or no effect)? Explain.
  3. Again, assume the lease amount is booked as a debit to a long-term asset, and the credits to both a short-term liability and a long-term liability. What will be the likely impact on Walgreen’s current ratio (increase, decrease, or no effect)? Explain.
  4. Is the impact of the new lease accounting standard going to be material for Walgreens? How do you know?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

  • Student handout (pdf) (word) (contains entire blog posting + discussion questions)
  • PowerPoint file (brief article overview + discussion questions)

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License.

About Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Education.

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