WeWork: What Went Wrong
Coworking-space giant WeWork didn’t blow-up as much as it melted down. Valued at about $48 billion when it filed to go public in August, the company is, after a series of unfortunate events, now valued at about $8 billion.
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What went wrong? Probably several things, but surely at the top of the list would be the disclosure on page 27 of its IPO filing, where WeWork noted it had leased office space totaling $47 billion with an average term of 15 years.* Against this liability, WeWork was leasing out space to individuals and start-ups — both notoriously unreliable — on a month-to-month basis. In the parlance of high finance, this is what is known as a mismatch of assets and liabilities.
Part of what shed light on extreme leverage at WeWork was an accounting change almost 12 years in the making known as Accounting Standards Codification (ASC) 842, which was chiefly promulgated by a standards body known as the Financial Accounting Standards Board. Heretofore, lease commitments were buried in financial statements and not consistently reported. Thanks to ASC 842, these obligations are right up front on the balance sheet, and when the would-be IPO investors saw the amount of leverage on WeWork’s balance sheet, they balked, and the dominoes started to fall.**
* Anonymous, (2019). The We Company Registration Statement. U.S. Securities and Exchange Commission. Retrieved November, 2019
** Anonymous, (2019). What is ASC 842?. LeaseAccounting.com. Retrieved November, 2019