Effects of lease capitalization techniques on key measures of
Abstract
This paper examines the effects of
representative companies from five different industries. Changes to financial statement elements
(assets, liabilities, equity, and net income) and key performance measure
ratio (D/A), total debt-to-equity ratio (D/E), long
assets (ROA), and return on equity (ROE)) are compared and contrasted both among companies
and by capitalization technique.
affected by lease capitalization. In addition, the
capitalization model does not result in greate
informs the continuing harmonization efforts related to lease accounting being undertaken by the
Financial Accounting Standards Board (FASB) and the International Accounting Standards
Board (IASB).
Keywords: lease capitalization, financial performance measures,
board (FASB), international financial reporting standards (IFRS),
standards board (IASB), harmonization
Journal of Finance and Accountancy
Effects of lease capitalization, Page
Effects of lease capitalization techniques on key measures of
financial performance
Eric D. Bostwick
University of West Florida
Robert T. Fahnestock
University of West Florida
W. Timothy O’Keefe
University of West Florida
This paper examines the effects of selected lease capitalization techniques
five different industries. Changes to financial statement elements
(assets, liabilities, equity, and net income) and key performance measures (total debt to assets
equity ratio (D/E), long-term debt-to-equity ratio (LTD/E), return on
assets (ROA), and return on equity (ROE)) are compared and contrasted both among companies
and by capitalization technique. The retail (pharmaceutical) firm in the sample is the
ected by lease capitalization. In addition, the complexity and/or specificity of the lease
not result in greater consensus among the methods. This research
continuing harmonization efforts related to lease accounting being undertaken by the
Financial Accounting Standards Board (FASB) and the International Accounting Standards
lease capitalization, financial performance measures, financial accounting standards
board (FASB), international financial reporting standards (IFRS), international accounting
harmonization
Journal of Finance and Accountancy
Effects of lease capitalization, Page 1
Effects of lease capitalization techniques on key measures of
elected lease capitalization techniques for five
five different industries. Changes to financial statement elements
s (total debt to assets
equity ratio (LTD/E), return on
assets (ROA), and return on equity (ROE)) are compared and contrasted both among companies
is the most (least)
of the lease
This research
continuing harmonization efforts related to lease accounting being undertaken by the
Financial Accounting Standards Board (FASB) and the International Accounting Standards
cial accounting standards
international accounting
INTRODUCTION
Historical Perspective
Differences between the accounting treatments for capital and operating lease
presented a dilemma to many in the financial community. The controversy over leases dates
back to the days of the Committee on Accounting Procedure (CAP) in
the final edition of the Accounting Research and Terminology Bulletins contained two and one
half pages on the subject of long-
Accounting Principles Board (APB) issued f
of such authoritative pronouncements Wyatt (1974) and Brown and Wyatt (1983) argued that a
lease arrangement is a legal liability that should be capitalized instead of being disclosed only in
a footnote. More recently, the FASB has issued more
Technical Bulletins on the subject
Lease pronouncements in the U.S. have evolved from principles
(e.g., ARB No. 37) to rules-based pronouncements (
development of “bright-line rules” to distinguish a capital lease from an operating lease.
However, there is evidence that bright
avoid capitalizing a lease arrangement that is substantially equiva
of an asset (Dieter 1979). Additionally, the structuring of the terms of the lease arrangement can
also result in what should be a capital lease being treated as an operating lease and what should
be an operating lease being treated as a capital lease (Coughlan 1980).
The bright-line rules have led to significant comparability issues. As Fahnestock (1998)
pointed out, the footnote disclosures for capital and operating leases are so different that it is
virtually impossible to compare one firm that has capital leases on the balance sheet to another
firm that has operating leases disclosed in the footnotes. Capital lease disclosures call for the
gross amount of the payments discounted to the present value. Operat
specify only the gross amount of the payments. Additionally, leases for real property and
tangible personal property are comingled in the disclosures. The difference in the disclosure
requirements for capital and operating leases re
numerous assumptions when trying to constructively capitalize operating leases for analytical
evaluation. This is an imperfect approach
(Fahnestock 1998; Fahnestock and King 2001; Imhoff, Lipe and Wright 1991, 1993, 1997).
The controversy surrounding capital versus operating leases has led researchers to
estimate the impact of non-capitalized operating leases on performance metrics. Using an
anecdotal approach, Imhoff, Lipe and Wright (1991, 1993, 1997) found significant differences in
specific performance metrics such as return on assets and debt to e
(2001) used a sample of firms and concluded that non
significant impact on some performance metrics
the long-term debt to equity ratio
was not significant.
There is also evidence that lending practices are
This is likely the result of the differences in performance metrics.
sent an original financial statement along with a disguised financial stateme
capitalized operating leases. The results revealed that lenders were more likely to make loans to
the firms with operating leases than to the firms with capital leases (Hartman and Sami 1989;
Journal of Finance and Accountancy
Effects of lease capitalization, Page
the accounting treatments for capital and operating lease
presented a dilemma to many in the financial community. The controversy over leases dates
back to the days of the Committee on Accounting Procedure (CAP) in the 1930’s. Chapter 14 of
dition of the Accounting Research and Terminology Bulletins contained two and one
-term leases (AICPA, 1961). Following the CAP, the
Accounting Principles Board (APB) issued five Opinions related to leases. Despite t
of such authoritative pronouncements Wyatt (1974) and Brown and Wyatt (1983) argued that a
lease arrangement is a legal liability that should be capitalized instead of being disclosed only in
, the FASB has issued more than 26 Standards, Interpretations, and
Technical Bulletins on the subject of leases.
Lease pronouncements in the U.S. have evolved from principles-based pronouncements
based pronouncements (e.g., SFAS No. 13) resulting in the
line rules” to distinguish a capital lease from an operating lease.
However, there is evidence that bright-line rules are easily manipulated such that the lessee can
avoid capitalizing a lease arrangement that is substantially equivalent to financing the purchase
of an asset (Dieter 1979). Additionally, the structuring of the terms of the lease arrangement can
also result in what should be a capital lease being treated as an operating lease and what should
treated as a capital lease (Coughlan 1980).
line rules have led to significant comparability issues. As Fahnestock (1998)
pointed out, the footnote disclosures for capital and operating leases are so different that it is
impossible to compare one firm that has capital leases on the balance sheet to another
firm that has operating leases disclosed in the footnotes. Capital lease disclosures call for the
gross amount of the payments discounted to the present value. Operating lease disclosures
specify only the gross amount of the payments. Additionally, leases for real property and
tangible personal property are comingled in the disclosures. The difference in the disclosure
requirements for capital and operating leases requires financial statement users to incorporate
numerous assumptions when trying to constructively capitalize operating leases for analytical
evaluation. This is an imperfect approach, at best, resulting in a host of measurement issues
ahnestock and King 2001; Imhoff, Lipe and Wright 1991, 1993, 1997).
The controversy surrounding capital versus operating leases has led researchers to
capitalized operating leases on performance metrics. Using an
ach, Imhoff, Lipe and Wright (1991, 1993, 1997) found significant differences in
ic performance metrics such as return on assets and debt to equity. Fahnestock and King
(2001) used a sample of firms and concluded that non-capitalized operating lease
performance metrics but not on others. For example, the effect on
quity ratio was significant, but the impact on the total debt to
evidence that lending practices are influenced by the lease accounting issue.
This is likely the result of the differences in performance metrics. In some studies,
an original financial statement along with a disguised financial statement with constructively
capitalized operating leases. The results revealed that lenders were more likely to make loans to
the firms with operating leases than to the firms with capital leases (Hartman and Sami 1989;
Journal of Finance and Accountancy
Effects of lease capitalization, Page 2
the accounting treatments for capital and operating leases have
presented a dilemma to many in the financial community. The controversy over leases dates
the 1930’s. Chapter 14 of
dition of the Accounting Research and Terminology Bulletins contained two and one-
term leases (AICPA, 1961). Following the CAP, the
pinions related to leases. Despite the issuance
of such authoritative pronouncements Wyatt (1974) and Brown and Wyatt (1983) argued that a
lease arrangement is a legal liability that should be capitalized instead of being disclosed only in
than 26 Standards, Interpretations, and
based pronouncements
SFAS No. 13) resulting in the
line rules” to distinguish a capital lease from an operating lease.
line rules are easily manipulated such that the lessee can
lent to financing the purchase
of an asset (Dieter 1979). Additionally, the structuring of the terms of the lease arrangement can
also result in what should be a capital lease being treated as an operating lease and what should
line rules have led to significant comparability issues. As Fahnestock (1998)
pointed out, the footnote disclosures for capital and operating leases are so different that it is
impossible to compare one firm that has capital leases on the balance sheet to another
firm that has operating leases disclosed in the footnotes. Capital lease disclosures call for the
ing lease disclosures
specify only the gross amount of the payments. Additionally, leases for real property and
tangible personal property are comingled in the disclosures. The difference in the disclosure
quires financial statement users to incorporate
numerous assumptions when trying to constructively capitalize operating leases for analytical
resulting in a host of measurement issues
ahnestock and King 2001; Imhoff, Lipe and Wright 1991, 1993, 1997).
The controversy surrounding capital versus operating leases has led researchers to
capitalized operating leases on performance metrics. Using an
ach, Imhoff, Lipe and Wright (1991, 1993, 1997) found significant differences in
quity. Fahnestock and King
capitalized operating leases had a
example, the effect on
ebt to equity ratio
by the lease accounting issue.
In some studies, lenders were
nt with constructively
capitalized operating leases. The results revealed that lenders were more likely to make loans to
the firms with operating leases than to the firms with capital leases (Hartman and Sami 1989;
Wilkins and Zimmer 1983). This led Lewi
and leasing were not substitutes but were complements. In short, management has three options
with regard to financing assets: equity, debt, and operating leases.
Overview of Accounting for Leases
When accounting for a capital lease under current U.S. GAAP, a lessee generally reports
both a leased asset and a related lease liability for the present value of the payments to be made
over the lease term. The liability is amortized as paid, and the leased
lease payments are separated into interest expense and principal
interest expense and depreciation expense are reported on the income statement.
When accounting for operating leases, neither a lease
reported on the balance sheet. Instead, annual lease payments are accounted for as rent expense.
This lease accounting treatment is considered appropriate when the lease fails to meet one of
four bright-line criteria set forth by FASB to determine when a lease should be capitalized (ASC
840-10-25-1). These criteria are as follows: 1) the lease contains a transfer of ownership at the
end of the lease term, 2) the lease contains a bargain purchase option (BPO), 3) the leas
equal to 75% or more of the asset’s remaining useful life, or 4) the present value of the minimum
lease payments is equal to 90% or more of the asset’s fair market value (note: criteria 3 and 4 are
not applicable to assets leased in the last 25%
A common criticism of these criteria is that lessees can intentionally fail these tests to
achieve operating lease treatment, and
majority of long-term corporate leases
However, companies are required to disclose operating lease payments for each of the next five
years along with the total for all operating lease payments to be made
no technique will provide an exact answer, these disclosures and a few assumptions make it
possible to approximate the effects of capitalizing operating leases. However, there is
diminishing marginal return in terms of “accurac
PURPOSE OF THE STUDY
Although the theoretical question of the “right way” to
importance, the purpose of this paper is to examine the practical considerations
capitalization of virtually all lease
Standards Board (IASB) (IASB 2010).
capital leases could result in disruption
violations of loan covenants as a result of these changes
issues, this paper empirically determine
techniques on financial statement elem
METHODOLOGY AND RESULTS
The lease capitalization techniques
literature, textbooks, and practice
(Macy’s, ExxonMobil, JPMorgan Chase
of industries expected to be more (Macy’s, retail) or less (JPMorgan Chase, banking) susceptible
Journal of Finance and Accountancy
Effects of lease capitalization, Page
Wilkins and Zimmer 1983). This led Lewis and Schallheim (1992) to the conclusion that debt
and leasing were not substitutes but were complements. In short, management has three options
equity, debt, and operating leases.
Overview of Accounting for Leases
accounting for a capital lease under current U.S. GAAP, a lessee generally reports
both a leased asset and a related lease liability for the present value of the payments to be made
over the lease term. The liability is amortized as paid, and the leased asset is depreciated. Thus,
o interest expense and principal repayment portions; and both
interest expense and depreciation expense are reported on the income statement.
When accounting for operating leases, neither a leased asset nor a lease liability are
reported on the balance sheet. Instead, annual lease payments are accounted for as rent expense.
This lease accounting treatment is considered appropriate when the lease fails to meet one of
forth by FASB to determine when a lease should be capitalized (ASC
1). These criteria are as follows: 1) the lease contains a transfer of ownership at the
end of the lease term, 2) the lease contains a bargain purchase option (BPO), 3) the leas
equal to 75% or more of the asset’s remaining useful life, or 4) the present value of the minimum
lease payments is equal to 90% or more of the asset’s fair market value (note: criteria 3 and 4 are
not applicable to assets leased in the last 25% of their total economic lives).
A common criticism of these criteria is that lessees can intentionally fail these tests to
achieve operating lease treatment, and this assertion is corroborated by the fact that the vast
term corporate leases are classified as operating leases rather than capital leases.
However, companies are required to disclose operating lease payments for each of the next five
years along with the total for all operating lease payments to be made after year five. Although
no technique will provide an exact answer, these disclosures and a few assumptions make it
possible to approximate the effects of capitalizing operating leases. However, there is
diminishing marginal return in terms of “accuracy” as the complexity of the methods increases.
Although the theoretical question of the “right way” to account for leases is of great
importance, the purpose of this paper is to examine the practical considerations regarding the
leases as proposed by the FASB and the International Accounting
Standards Board (IASB) (IASB 2010). The requirement that nearly all leases be treated as
disruption of common measures of financial performance
as a result of these changes are also of concern. To address
, this paper empirically determines the effect of the selected constructive capitalization
financial statement elements and financial ratios.
ESULTS
ease capitalization techniques used in this paper were selected from accounting
literature, textbooks, and practice and were applied to the financial statements of five companies
ExxonMobil, JPMorgan Chase, Caterpillar, and Pfizer,) representing a broad spectrum
of industries expected to be more (Macy’s, retail) or less (JPMorgan Chase, banking) susceptible
Journal of Finance and Accountancy
Effects of lease capitalization, Page 3
s and Schallheim (1992) to the conclusion that debt
and leasing were not substitutes but were complements. In short, management has three options
accounting for a capital lease under current U.S. GAAP, a lessee generally reports
both a leased asset and a related lease liability for the present value of the payments to be made
asset is depreciated. Thus,
repayment portions; and both
d asset nor a lease liability are
reported on the balance sheet. Instead, annual lease payments are accounted for as rent expense.
This lease accounting treatment is considered appropriate when the lease fails to meet one of
forth by FASB to determine when a lease should be capitalized (ASC
1). These criteria are as follows: 1) the lease contains a transfer of ownership at the
end of the lease term, 2) the lease contains a bargain purchase option (BPO), 3) the lease term is
equal to 75% or more of the asset’s remaining useful life, or 4) the present value of the minimum
lease payments is equal to 90% or more of the asset’s fair market value (note: criteria 3 and 4 are
A common criticism of these criteria is that lessees can intentionally fail these tests to
fact that the vast
as operating leases rather than capital leases.
However, companies are required to disclose operating lease payments for each of the next five
after year five. Although
no technique will provide an exact answer, these disclosures and a few assumptions make it
possible to approximate the effects of capitalizing operating leases. However, there is
y” as the complexity of the methods increases.
leases is of great
regarding the
FASB and the International Accounting
requirement that nearly all leases be treated as
performance. Potential
To address these
constructive capitalization
selected from accounting
to the financial statements of five companies
) representing a broad spectrum
of industries expected to be more (Macy’s, retail) or less (JPMorgan Chase, banking) susceptible
to changes resulting from the capitalization of operating leases. Changes
were measured with respect to total assets, total liabilities, total equity, and net income. In
addition, changes to the following key performance ratios were also measured:
(D/A), debt to equity ratio (D/E), lo
(ROA), and return on equity (ROE). Each of the lease capitalization techniques selected is
discussed in detail below, and the results of applying the techniques to each company are
presented at the end of this section.
Lease Capitalization Techniques
The purpose of lease capitalization techniques is to adjust the financial statements to
show what would have resulted if operating leases had been accounted for as capital leases.
key assumptions related to lease capitalization are
rate used to discount these future
leased asset, and the tax rate faced by the company (tax
Depreciation that is assumed to have been taken in prior years will reduce the book value of the
leased asset and thus reduce the amount by which long
time that the constructive capitalization occ
reduce future net income. Each of these assumptions is handled in different ways by d
lease capitalization techniques.
The work of Imhoff, Lipe, and Wright (ILW) is often viewed as the seminal contribution
in the area of operating lease capitalization.
techniques from 1991, 1993, and 1997, along with modified versions of the 1
methods. ILW’s 1991 technique (ILW
corporation, and their assumptions
assumed that operating lease payments beyond year five were exp
level as the fifth year’s payment
determined the discount rate applied to these lease payments
itself, was computed as 70% of the
depreciation on the asset); and the
years. Although the effects on the income statement were largely ignored, a tax rate of 40% was
also assumed. While this study applied this
applied in a modified form allowing the asset life to match the num
remaining (instead of using a stati
referred to as ILW-91*.
The 1993 ILW method (ILW
explanation of a commonly-used
explanation of) the 1991 method.
ILW’s work as much as it represents the application of a practitioner’s rule
presented, ILW-93 estimated the
liabilities as eight times the annual operating lease
effects were estimated by reclassifying
Although this would have no effect on net income, is would affect intermediate subtotals such as
operating income and earnings before interest and tax (EBIT).
In their 1997 method (ILW
previous papers. The discount rate
Journal of Finance and Accountancy
Effects of lease capitalization, Page
to changes resulting from the capitalization of operating leases. Changes to financial statement
were measured with respect to total assets, total liabilities, total equity, and net income. In
addition, changes to the following key performance ratios were also measured: debt to asset ratio
(D/A), debt to equity ratio (D/E), long-term debt to equity ratio (LTD/E), return on assets
return on equity (ROE). Each of the lease capitalization techniques selected is
discussed in detail below, and the results of applying the techniques to each company are
d of this section.
Lease Capitalization Techniques
The purpose of lease capitalization techniques is to adjust the financial statements to
show what would have resulted if operating leases had been accounted for as capital leases.
d to lease capitalization are the timing and amount of lease payments, the
future lease payments, the past and future depreciation
, and the tax rate faced by the company (tax effects are ignored by some methods)
assumed to have been taken in prior years will reduce the book value of the
leased asset and thus reduce the amount by which long-lived assets should be increased
time that the constructive capitalization occurs. Depreciation anticipated in future years will
reduce future net income. Each of these assumptions is handled in different ways by d
The work of Imhoff, Lipe, and Wright (ILW) is often viewed as the seminal contribution
e capitalization. This paper includes three versions of the ILW
techniques from 1991, 1993, and 1997, along with modified versions of the 1991 and 1997
s 1991 technique (ILW-91) recast the financial statements of McDonald’s
, and their assumptions have been applied statically in contemporary studies
operating lease payments beyond year five were expected to continue at the same
until the future payable amount was exhausted,
the discount rate applied to these lease payments should be 10%. The leased asset,
70% of the present value of the lease payments (due to prior year
the asset depreciation was assumed to continue for
. Although the effects on the income statement were largely ignored, a tax rate of 40% was
study applied this method as originally proposed, this method was
applied in a modified form allowing the asset life to match the number of lease payments
static 15-year remaining life). The revised ILW-91 method
method (ILW-93) was not so much a new technique as it was an
used practitioner heuristic along with a comparison to (and further
. Thus, ILW-93 as applied in this paper does not represent
ILW’s work as much as it represents the application of a practitioner’s rule-of-thumb.
ted the operating lease related increase to a company’s
eight times the annual operating lease related rent expense. Income statement
reclassifying one-third of the rent expense as interest expense.
hough this would have no effect on net income, is would affect intermediate subtotals such as
operating income and earnings before interest and tax (EBIT).
In their 1997 method (ILW-97), ILW operationalized several suggestions made in their
discount rate was allowed to vary among firms based on each firm’s
Journal of Finance and Accountancy
Effects of lease capitalization, Page 4
to financial statements
were measured with respect to total assets, total liabilities, total equity, and net income. In
debt to asset ratio
return on assets
return on equity (ROE). Each of the lease capitalization techniques selected is
discussed in detail below, and the results of applying the techniques to each company are
The purpose of lease capitalization techniques is to adjust the financial statements to
show what would have resulted if operating leases had been accounted for as capital leases. The
the timing and amount of lease payments, the
payments, the past and future depreciation related to the
by some methods).
assumed to have been taken in prior years will reduce the book value of the
lived assets should be increased at the
in future years will
reduce future net income. Each of these assumptions is handled in different ways by different
The work of Imhoff, Lipe, and Wright (ILW) is often viewed as the seminal contribution
paper includes three versions of the ILW
991 and 1997
91) recast the financial statements of McDonald’s
in contemporary studies. ILW
ected to continue at the same
, and they
10%. The leased asset,
prior years’
for another 15
. Although the effects on the income statement were largely ignored, a tax rate of 40% was
this method was also
ber of lease payments
91 method is
was not so much a new technique as it was an
along with a comparison to (and further
93 as applied in this paper does not represent
thumb. As
a company’s assets and
Income statement
third of the rent expense as interest expense.
hough this would have no effect on net income, is would affect intermediate subtotals such as
operationalized several suggestions made in their
each firm’s
capital lease rate or the average rate the company paid for interest
years of asset depreciation were also allowed to vary to match the estimated length
lease payments. ILW-97 also estimated the effects of deferred taxes, allowing lease
capitalization to affect net income.
was also applied to all other methods in this study.
included the asset capitalization value (although it was increased from 70% to 75% of the lease
liability) and the tax rate (40%).
was also applied in a modified form which allowed the asset capitalization value to vary among
companies based on the estimated years of depreciation
was determined by subtracting the estimated years of depreciation rema
total life for similar long-lived assets
method is referred to as ILW-97*
In 2001, Fahnestock and King
contributions to lease capitalization. FK
firm-specific discount rates and matches
payments; however, the FK-01 method
of deferred income tax. Two other
for constructive capitalization and the splitting of the liability adjustment into current on
noncurrent portions. The FK-01 method constructively capitalizes
the present value of the lease payments
and then calculates the asset and liability values
the leased asset is depreciated and the lease liability
year amounts. These estimated ending
amounts to determine the necessary
liability into current and long-term
expense from the stated lease payment for the
of the payment. This distinction
(i.e., LTD/E) in addition to changes related to total debt
technique was applied to all other methods for the purpose of computing
long-term debt to equity ratio across all firms
The final technique was sel
and Valuation by Easton, McAnally, Fairfield, Zhang, Halsey (EMFZH
similarity to the FK-01 method. EMFZH
matched asset depreciation to the length of future lease payments
capitalization value was set at 100% of the lease liability adjustment
determined as of the end of the year
beginning of the year). Net income was adjusted by adding back rent expense and deducting
both depreciation expense and interest expense, but these adjustments were computed based on
the following year’s numbers. Depreciation was also computed using estimated actual years of
life remaining as opposed to rounding up (or down) to the nearest whole year.
EMFZH-09 method ignores deferred tax
determine the tax effects of changes to net income. T
adjust both total assets (in addition to the 100% of liability adjustment above) and
before ratios were calculated. Since this technique was presented
method is more concerned with computing rat
Journal of Finance and Accountancy
Effects of lease capitalization, Page
or the average rate the company paid for interest-bearing debt. The remaining
also allowed to vary to match the estimated length
97 also estimated the effects of deferred taxes, allowing lease
capitalization to affect net income. For comparative purposes, the computation of deferred taxes
was also applied to all other methods in this study. Other assumptions that remained static
included the asset capitalization value (although it was increased from 70% to 75% of the lease
. In addition to applying this method as proposed,
also applied in a modified form which allowed the asset capitalization value to vary among
s based on the estimated years of depreciation taken in previous years.
was determined by subtracting the estimated years of depreciation remaining from the estimated
lived assets owned (not leased) by the company. The revised ILW
97*.
Fahnestock and King (FK-01) presented a technique that makes several unique
contributions to lease capitalization. FK-01 is similar to the ILW-97 methodology
matches asset depreciation to the length of future lease
01 method uses firm-specific marginal tax rates for the computation
other unique contributions of the FK-01 method are the technique
for constructive capitalization and the splitting of the liability adjustment into current on
01 method constructively capitalizes the leased asset
payments as of the beginning (instead of the end) of the fiscal year
asset and liability values forward to determine the year end values
depreciated and the lease liability is amortized based upon beginning
ending values are then compared to the originally reported
necessary asset and liability adjustments. The separation of
term portions is accomplished by deducting the computed interest
expense from the stated lease payment for the year which equals the principal reduction portion
This distinction permits the computation of changes related to long
to changes related to total debt (i.e., D/A and D/E). This splitting
was applied to all other methods for the purpose of computing and comparing
across all firms.
The final technique was selected from the 2009 edition of Financial Statement Analysis
by Easton, McAnally, Fairfield, Zhang, Halsey (EMFZH-09), and it
01 method. EMFZH-09 allowed for firm-specific discount rates
matched asset depreciation to the length of future lease payments. Although the
at 100% of the lease liability adjustment, this computation was
of the year (unlike FK-01 which determined these adjustments as of the
Net income was adjusted by adding back rent expense and deducting
both depreciation expense and interest expense, but these adjustments were computed based on
Depreciation was also computed using estimated actual years of
e remaining as opposed to rounding up (or down) to the nearest whole year. Although t
eferred tax effects, a static tax rate of 37.5% was applied
fects of changes to net income. These income statement effects were
assets (in addition to the 100% of liability adjustment above) and
Since this technique was presented for use by practitioners
method is more concerned with computing ratios based on the estimated effects of lease
Journal of Finance and Accountancy
Effects of lease capitalization, Page 5
bearing debt. The remaining
also allowed to vary to match the estimated length of future
97 also estimated the effects of deferred taxes, allowing lease
For comparative purposes, the computation of deferred taxes
umptions that remained static
included the asset capitalization value (although it was increased from 70% to 75% of the lease
this method as proposed, this method
also applied in a modified form which allowed the asset capitalization value to vary among
. This estimate
ining from the estimated
revised ILW-97
that makes several unique
gy in that it uses
asset depreciation to the length of future lease
specific marginal tax rates for the computation
01 method are the technique
for constructive capitalization and the splitting of the liability adjustment into current on
the leased asset at 100% of
of the fiscal year
year end values. Thus,
based upon beginning-of-the-
then compared to the originally reported
ion of the lease
is accomplished by deducting the computed interest
reduction portion
the computation of changes related to long-term debt
This splitting
and comparing the
Financial Statement Analysis
), and it bears some
specific discount rates and
. Although the asset
utation was
01 which determined these adjustments as of the
Net income was adjusted by adding back rent expense and deducting
both depreciation expense and interest expense, but these adjustments were computed based on
Depreciation was also computed using estimated actual years of
Although the
was applied to
ects were used to
assets (in addition to the 100% of liability adjustment above) and total equity
practitioners, the
ios based on the estimated effects of lease
capitalization than it is with the effects
balance sheet.
Company Selection
This study uses the 2009 financial statements of Macy’s, ExxonMobil, Caterpillar, Pfizer,
and JPMorgan Chase. These companies were chosen
exhibit the effects of operating lease capitalization to
retail sector which makes extensive use o
conglomerate, uses both operating and capital leases to supply its physical asset needs.
Caterpillar, a heavy equipment manufacturer, is in a un
not only using leases to supply its manufacturing needs, but also
equipment through both operating and capita
uses leases very little. Finally, JPMorgan Chase represents the finance/banking industry which
often self-finances its physical assets and makes little use o
one would expect the effects of capitalizing operating leases to have the most (leas
effects on the financial statements and key performance measures
with ExxonMobil, Caterpillar, and Pfizer experiencing varying degrees of change between these
two extremes.
Financial Statement and Ratio Effects
Application of the seven lease capitalization techniques to the financial statements of the
five selected companies generally aligned with expectations. The changes across all seven
methods were averaged to approximate a consensus effect on the financial
assets, total liabilities, total equity,
ROA, and ROE). Changes to assets, liabilities, D/A, D/E, and LTD/E were expected to be
positive, and changes to equity, net income, ROA, and
Comparisons across these nine financial performance
terms of the direction of the expected changes (i.e., the largest positive change or the largest
negative change, respectively). These results are
Tables 1 through 5 (Appendix).
provide computations related to a particular
Overall, Macy’s (Table 1
measures except for D/A for which it had the second largest average percentage change.
Somewhat surprisingly, ExxonMobil
on several measures ranking first
LTD/E), and third on the remaining
JPMorgan Chase (Table 3, Appendix
ROA, and ROE), third on one measure (LTD/E),
measures (assets, liabilities, and D/A). Caterpillar (Table 4
average percentage change on three measures (assets, liabilities, and D/E),
average percentage change on three
average percentage change on three measures (net income,
ROE and Net Income for Caterpillar
was opposite from both the expected result and the behavior of the other companies in the
Journal of Finance and Accountancy
Effects of lease capitalization, Page
effects of deferred taxes or with constructing a fully
study uses the 2009 financial statements of Macy’s, ExxonMobil, Caterpillar, Pfizer,
companies were chosen to represent five industries expected to
the effects of operating lease capitalization to varying degrees. Macy’s represents the
retail sector which makes extensive use of operating leases. ExxonMobil, an oil and gas
conglomerate, uses both operating and capital leases to supply its physical asset needs.
Caterpillar, a heavy equipment manufacturer, is in a unique position as both a lessee and a lessor:
not only using leases to supply its manufacturing needs, but also financing the sales of its
equipment through both operating and capital leases. Pfizer, a pharmaceuticals manufacturer,
Finally, JPMorgan Chase represents the finance/banking industry which
finances its physical assets and makes little use of external lease arrangements.
would expect the effects of capitalizing operating leases to have the most (leas
effects on the financial statements and key performance measures of Macy’s (JPMorgan Chase
with ExxonMobil, Caterpillar, and Pfizer experiencing varying degrees of change between these
Financial Statement and Ratio Effects
of the seven lease capitalization techniques to the financial statements of the
five selected companies generally aligned with expectations. The changes across all seven
methods were averaged to approximate a consensus effect on the financial statements (total
assets, total liabilities, total equity, and net income) and financial ratios (D/A, D/E, LTD/E,
Changes to assets, liabilities, D/A, D/E, and LTD/E were expected to be
positive, and changes to equity, net income, ROA, and ROE were expected to be negative.
financial performance measures were identified as
terms of the direction of the expected changes (i.e., the largest positive change or the largest
These results are discussed below and presented by company in
The tables include blank cells for techniques that did not
a particular measure of interest.
Macy’s (Table 1, Appendix) had the largest average percentage change on all
measures except for D/A for which it had the second largest average percentage change.
Somewhat surprisingly, ExxonMobil (Table 2, Appendix) also showed a large percentage change
first on D/A, second on four measures (asset, liabilities, D/E and
, and third on the remaining four measures (equity, net income, ROA, and ROE)
, Appendix) ranked second on four measures (equity, net income,
measure (LTD/E), fourth on one measure (D/E), and last on
D/A). Caterpillar (Table 4, Appendix) had the third largest
on three measures (assets, liabilities, and D/E), the fourth largest
three measures (equity, D/A, and LTD/E), and the smallest
three measures (net income, ROA, and ROE). Interestingly,
Caterpillar increased as a result of operating lease capitalization
was opposite from both the expected result and the behavior of the other companies in the
Journal of Finance and Accountancy
Effects of lease capitalization, Page 6
or with constructing a fully-articulating
study uses the 2009 financial statements of Macy’s, ExxonMobil, Caterpillar, Pfizer,
five industries expected to
Macy’s represents the
ExxonMobil, an oil and gas
conglomerate, uses both operating and capital leases to supply its physical asset needs.
n as both a lessee and a lessor:
financing the sales of its
. Pfizer, a pharmaceuticals manufacturer,
Finally, JPMorgan Chase represents the finance/banking industry which
f external lease arrangements. Thus,
would expect the effects of capitalizing operating leases to have the most (least) significant
JPMorgan Chase)
with ExxonMobil, Caterpillar, and Pfizer experiencing varying degrees of change between these
of the seven lease capitalization techniques to the financial statements of the
five selected companies generally aligned with expectations. The changes across all seven
statements (total
net income) and financial ratios (D/A, D/E, LTD/E,
Changes to assets, liabilities, D/A, D/E, and LTD/E were expected to be
ROE were expected to be negative.
identified as “large” in
terms of the direction of the expected changes (i.e., the largest positive change or the largest
presented by company in
The tables include blank cells for techniques that did not
had the largest average percentage change on all
measures except for D/A for which it had the second largest average percentage change.
also showed a large percentage change
(asset, liabilities, D/E and
net income, ROA, and ROE).
net income,
and last on three
had the third largest
fourth largest
the smallest
Interestingly, the
erating lease capitalization; this
was opposite from both the expected result and the behavior of the other companies in the
sample. Finally, lease capitalization
Appendix): ranking third on one measure (D/A), fourth on
income, ROA, and ROE), and last on the remaining
In summary, lease capitalization had the largest effect on Macy’s (retail indus
JPMorgan Chase (banking industry), which was expected to exhibit the smallest degree of
change, actually had the third largest degree of change
and Caterpillar (heavy equipment manufacturing)
Pfizer (pharmaceutical industry)
companies.
Comparison of Lease Capitalization Techniques
To compare the lease capitalization
five companies on each performance measure
shown in Table 6 (Appendix) with the highest and lowest average changes shaded
mean and standard deviation for all changes
grand mean and standard deviation to outliers, the
computed a second time after omitting the highest and lowes
Comparing the financial statement
produced by the ILW-93 (ILW-97*)
produced by the ILW-93 (ILW-91)
amount; and while both the FK-01 and EMFZH
increased equity by the greater of these two methods
signs with two methods (FK-01 and EMFZH
ILW-97*) decreasing net income. T
With respect to ratio changes, D/A increased the most
method. D/E and LTD/E were each increased
Since net income was decreased by two methods and increased by two other methods, the
resulting ROA and ROE calculations also decreased and increased accordingly
producing the largest decreases fo
for ROA and ROE. FK-01 was the only method to increase ROA, and one of only two method
(the other being EMFZH-09) to increase ROE.
In summary, ILW-97* and FK
nine financial measures. ILW-97* produced
(equity, net income, D/E, LTD/E, ROA, and ROE)
FK-01 were either the lowest computed change
changes) were the changes most contrary to expectations
ROA, and ROE). ILW-93 accounted for the other three extreme highest values (assets,
liabilities, and D/A), and ILW-91 accounted for the
Considering these methods, ILW
remainder from other calculations. This would have provided a
rather than an annual effect. The FK
rent expense and the estimated interest expense and depreciation expense that would have been
reported within the given year without respect to cumulative adjustments
focus and procedure most likely
two methods.
Journal of Finance and Accountancy
Effects of lease capitalization, Page
lease capitalization had the smallest overall effect on Pfizer (Table 5
ranking third on one measure (D/A), fourth on five measures (assets, liabilities, net
), and last on the remaining three measures (equity, D/E, and LTD/E
, lease capitalization had the largest effect on Macy’s (retail industry)
JPMorgan Chase (banking industry), which was expected to exhibit the smallest degree of
change, actually had the third largest degree of change. ExxonMobil (oil and gas conglomerate)
and Caterpillar (heavy equipment manufacturing) ranked second and fourth, respectively
showed the smallest degree of change among the five
Comparison of Lease Capitalization Techniques
lease capitalization techniques, themselves, the average change
five companies on each performance measure was calculated for each method. These results are
with the highest and lowest average changes shaded
for all changes are also presented. To measure the sensitivity of the
grand mean and standard deviation to outliers, the grand mean and standard deviation were
omitting the highest and lowest percentage changes
the financial statement changes, the largest (smallest) increase
97*) method, and the largest (smallest) increase to liabilities was
91) method. For equity, ILW-97* reduced equity by the largest
01 and EMFZH-09 methods increased equity, the FK
increased equity by the greater of these two methods. Changes to net income were of different
01 and EMFZH-09) increasing and two methods (ILW
97*) decreasing net income. The remaining three methods did not adjust net incom
With respect to ratio changes, D/A increased the most (least) under the ILW
and LTD/E were each increased the most (least) by the ILW-97* (FK
Since net income was decreased by two methods and increased by two other methods, the
resulting ROA and ROE calculations also decreased and increased accordingly with
for ROA and ROE, and FK-01 producing the largest
01 was the only method to increase ROA, and one of only two method
09) to increase ROE.
and FK-01 each accounted for seven extreme values across the
97* produced one lowest value (assets) and six highest values
LTD/E, ROA, and ROE). All seven of the extreme values produced by
computed changes or (for measures with both positive and negative
changes) were the changes most contrary to expectations (equity, net income, D/A
93 accounted for the other three extreme highest values (assets,
91 accounted for the remaining lowest value (liabilities).
Considering these methods, ILW-97* introduced the determination of a deferred tax liability as a
remainder from other calculations. This would have provided a cumulative effect of equity
effect. The FK-01 method recast the income statement using the actual
rent expense and the estimated interest expense and depreciation expense that would have been
reported within the given year without respect to cumulative adjustments. This difference in
accounts for the generally inverse relationship between these
Journal of Finance and Accountancy
Effects of lease capitalization, Page 7
on Pfizer (Table 5,
measures (assets, liabilities, net
D/E, and LTD/E).
try), as expected.
JPMorgan Chase (banking industry), which was expected to exhibit the smallest degree of
ExxonMobil (oil and gas conglomerate)
econd and fourth, respectively; and
showed the smallest degree of change among the five
age change across all
calculated for each method. These results are
with the highest and lowest average changes shaded. The grand
also presented. To measure the sensitivity of the
and standard deviation were
t percentage changes.
increase to assets was
to liabilities was
equity by the largest
equity, the FK-01
. Changes to net income were of different
(ILW-97 and
he remaining three methods did not adjust net income).
under the ILW-93 (FK-01)
(FK-01) method.
Since net income was decreased by two methods and increased by two other methods, the
with ILW-97*
the largest increases
01 was the only method to increase ROA, and one of only two methods
extreme values across the
highest values
ll seven of the extreme values produced by
s or (for measures with both positive and negative
, D/A, D/E, LTD/E,
93 accounted for the other three extreme highest values (assets,
(liabilities).
97* introduced the determination of a deferred tax liability as a
effect of equity
01 method recast the income statement using the actual
rent expense and the estimated interest expense and depreciation expense that would have been
is difference in
relationship between these
Considering the average changes across all methods, the grand mean and the revised grand mean
(excluding the highest and lowest value) exhibit a fairly consistent relationship.
extreme values were removed, all
of equity which moved slightly farther away from zero
deviation also moved closer to zero for all financial measures (with the exception of LTD/E)
when extreme values were removed.
IMPLICATIONS, LIMITATIONS, AND FUTURE RESEARCH
This paper empirically examined and compared
techniques on financial statement elements and key performance measures for five major U.S.
corporations. While in some cases
surprising given the number of assumptions and estimates that must be made to constructively
capitalize operating leases. Interestingly, two of the most detailed methods, ILW
01, produced nearly opposite effects on the financial statements and ratios. This indicates that
the complexity or specificity of the method, alone, does not nec
more consistent lease capitalization results.
IASB, and other interested stakeholders not only about the effects of capitalizing operating leases
in general, but also about the results of using various techniques to capitalize those leases.
The study is limited by the f
respective authors, and that the assumptions used
contemporary understanding of accounting theory and
example, the practitioner-oriented approaches are not careful to define and restate current year
transactions within the current year. These methods inherently recognize
capitalization approximates financial statement effects, and they
their computation of financial statement adjustments.
deferred tax liabilities when tax depreciation is only implicitly included via the use of each
company’s average tax rate. A strictly rec
of the cumulative differences between financial and tax depreciation methods. While it may be
agreed that the assumptions required to approximate these differences could vary widely with
little difference in the final values,
other calculations, rather than computing it independently, is a limitation of certain methods
Regardless of the assumptions used, lease capitalization techniques are
estimates of the various performance measures that they seek to compute; and this will continue
to be true so long as companies are not required (or do not choose) to disclose the actual
parameters that must currently be estimated to constructiv
more complex methods give a greater sense of confidence in the estimates produced, they do not
necessarily provide estimates that are more “accurate” than the estimates produced by less
complex methods. Thus, a point of diminishing marginal “accuracy” may be reached with
respect to complexity.
Journal of Finance and Accountancy
Effects of lease capitalization, Page
Considering the average changes across all methods, the grand mean and the revised grand mean
(excluding the highest and lowest value) exhibit a fairly consistent relationship.
all performance measures moved closer to zero with the exception
of equity which moved slightly farther away from zero. As would be expected, the
moved closer to zero for all financial measures (with the exception of LTD/E)
removed.
IMPLICATIONS, LIMITATIONS, AND FUTURE RESEARCH
This paper empirically examined and compared the effects of various lease capitalization
techniques on financial statement elements and key performance measures for five major U.S.
e cases the divergence among the methods is extreme, this is not
surprising given the number of assumptions and estimates that must be made to constructively
Interestingly, two of the most detailed methods, ILW
produced nearly opposite effects on the financial statements and ratios. This indicates that
the complexity or specificity of the method, alone, does not necessarily produce more accurate
lease capitalization results. These findings provide feedback to the FASB, the
IASB, and other interested stakeholders not only about the effects of capitalizing operating leases
in general, but also about the results of using various techniques to capitalize those leases.
limited by the fact that the methods were applied as described by their
the assumptions used by the authors may or may not agree with a
contemporary understanding of accounting theory and/or the applications of such theory. For
oriented approaches are not careful to define and restate current year
transactions within the current year. These methods inherently recognize that constructive
financial statement effects, and they are correspondingly general in
their computation of financial statement adjustments. Another example is the inclusion
deferred tax liabilities when tax depreciation is only implicitly included via the use of each
company’s average tax rate. A strictly reconstructive approach would require an approximation
of the cumulative differences between financial and tax depreciation methods. While it may be
agreed that the assumptions required to approximate these differences could vary widely with
e in the final values, adjusting the deferred tax liability as the residual
computing it independently, is a limitation of certain methods
Regardless of the assumptions used, lease capitalization techniques are inherently
estimates of the various performance measures that they seek to compute; and this will continue
to be true so long as companies are not required (or do not choose) to disclose the actual
parameters that must currently be estimated to constructively capitalize operating leases. While
more complex methods give a greater sense of confidence in the estimates produced, they do not
necessarily provide estimates that are more “accurate” than the estimates produced by less
t of diminishing marginal “accuracy” may be reached with
Journal of Finance and Accountancy
Effects of lease capitalization, Page 8
Considering the average changes across all methods, the grand mean and the revised grand mean
(excluding the highest and lowest value) exhibit a fairly consistent relationship. After the
with the exception
the standard
moved closer to zero for all financial measures (with the exception of LTD/E)
the effects of various lease capitalization
techniques on financial statement elements and key performance measures for five major U.S.
the divergence among the methods is extreme, this is not
surprising given the number of assumptions and estimates that must be made to constructively
Interestingly, two of the most detailed methods, ILW-97* and FK-
produced nearly opposite effects on the financial statements and ratios. This indicates that
essarily produce more accurate or
ovide feedback to the FASB, the
IASB, and other interested stakeholders not only about the effects of capitalizing operating leases
in general, but also about the results of using various techniques to capitalize those leases.
that the methods were applied as described by their
may or may not agree with a
the applications of such theory. For
oriented approaches are not careful to define and restate current year
constructive
correspondingly general in
Another example is the inclusion of
deferred tax liabilities when tax depreciation is only implicitly included via the use of each
onstructive approach would require an approximation
of the cumulative differences between financial and tax depreciation methods. While it may be
agreed that the assumptions required to approximate these differences could vary widely with
deferred tax liability as the residual amount from
computing it independently, is a limitation of certain methods.
inherently
estimates of the various performance measures that they seek to compute; and this will continue
to be true so long as companies are not required (or do not choose) to disclose the actual
ely capitalize operating leases. While
more complex methods give a greater sense of confidence in the estimates produced, they do not
necessarily provide estimates that are more “accurate” than the estimates produced by less
t of diminishing marginal “accuracy” may be reached with
Table
1:
Macy's
-Perc
enta
ge C
hange in
Key M
easure
s b
y L
ease C
apit
ali
zati
on M
eth
od
Meth
od
Assets
Lia
bE
quit
yN
/ID
/AD
/EL
TD
/ER
OA
RO
E
ILW
-91
4.2
%7.1
%-4
.4%
2.8
%1
2.0
%13.9
%-4
.1%
4.6
%
ILW
-91*
4.2
%7.0
%-4
.3%
2.7
%1
1.8
%13.6
%-4
.0%
4.5
%
ILW
-93
8.9
%11.8
%2.7
%1
1.8
%0.0
%-8
.1%
0.0
%
ILW
-97
5.4
%8.7
%-4
.3%
-68.7
%3.1
%1
3.6
%15.9
%-7
0.4
%-6
7.3
%
ILW
-97*
4.5
%8.5
%-7
.6%
-120.2
%3.9
%1
7.4
%19.7
%-1
19.3
%-1
21.8
%
FK
-01
7.3
%9.6
%0.4
%5.7
%2.2
%9.3
%11.8
%-1
.5%
5.3
%
Journal of Finance and Accountancy
Effects of lease capitalization, Page
FK
-01
7.3
%9.6
%0.4
%5.7
%2.2
%9.3
%11.8
%-1
.5%
5.3
%
EM
FZ
H-0
97.3
%9.7
%0.2
%3.1
%2.2
%9.5
%12.0
%-3
.9%
2.9
%
Avg C
hange
6.0
%8.9
%-3
.3%
-45.0
%2.8
%1
2.2
%14.5
%-3
0.2
%-2
8.7
%
Ta
ble
2:
Exx
onM
ob
il-P
erc
en
tag
e C
han
ge i
n K
ey M
ea
su
res b
y L
ea
se
Cap
ita
liza
tio
n M
eth
od
Meth
od
Asse
tsL
iab
Eq
uit
yN
/ID
/AD
/EL
TD
/ER
OA
RO
E
ILW
-91
2.3
%5.4
%-1
.2%
3.1
%6
.8%
8.5
%-2
.2%
1.3
%
ILW
-91
*2.4
%5.6
%-1
.3%
3.2
%7
.0%
8.9
%-2
.3%
1.3
%
ILW
-93
6.7
%1
2.8
%5
.7%
12
.8%
-6.3
%
ILW
-97
3.2
%7.2
%-1
.3%
-7.3
%3
.9%
8.7
%1
1.1
%-1
0.2
%-6
.1%
ILW
-97
*1.4
%5.5
%-3
.2%
-17
.3%
4.0
%8
.9%
10
.0%
-18
.4%
-14.6
%
FK
-01
5.4
%9.0
%1
.3%
7.4
%3
.4%
7.5
%1
1.3
%1
.9%
5.9
%
Journal of Finance and Accountancy
Effects of lease capitalization, Page 9
FK
-01
5.4
%9.0
%1
.3%
7.4
%3
.4%
7.5
%1
1.3
%1
.9%
5.9
%
EM
FZ
H-0
94.5
%8.0
%0
.6%
3.3
%3
.3%
7.3
%1
0.3
%-1
.1%
2.7
%
Avg C
hange
3.7
%7.6
%-0
.8%
-3.5
%3
.8%
8.4
%1
0.0
%-5
.5%
-1.6
%
Tab
le 3
: J
PM
org
an C
ha
se
-Pe
rce
nta
ge
Cha
ng
e i
n K
ey
Me
asure
s b
y L
ea
se
Ca
pit
ali
zati
on
Me
tho
d
Me
tho
dA
sse
tsL
iab
Eq
uit
yN
/ID
/AD
/EL
TD
/ER
OA
RO
E
ILW
-91
0.3
%0
.4%
-1.0
%0
.1%
1.4
%3
.6%
-0.3
%1
.0%
ILW
-91
*0
.3%
0.5
%-1
.0%
0.1
%1
.5%
3.8
%-0
.3%
1.1
%
ILW
-93
0.7
%0
.8%
0.1
%0
.8%
-0.7
%
ILW
-97
0.5
%0
.6%
-1.2
%-1
6.8
%0
.1%
1.8
%5
.0%
-17
.2%
-15
.8%
ILW
-97
*0
.3%
0.6
%-3
.4%
-48
.5%
0.3
%4
.2%
7.2
%-4
8.6
%-4
6.6
%
FK
-01
0.6
%0
.7%
0.1
%1.7
%0
.1%
0.6
%4
.0%
1.1
%5
.9%
Journal of Finance and Accountancy
Effects of lease capitalization, Page
FK
-01
0.6
%0
.7%
0.1
%1.7
%0
.1%
0.6
%4
.0%
1.1
%5
.9%
EM
FZ
H-0
90
.6%
0.7
%0
.0%
0.0
%0
.1%
0.7
%4
.2%
-0.7
%0
.0%
Avg
Chan
ge
0.5
%0
.6%
-1.1
%-1
5.9
%0
.1%
1.6
%4
.6%
-9.5
%-9
.1%
Table
4:
Cate
rpilla
r-P
erc
enta
ge C
hange in
Key M
easu
res b
y L
ease C
ap
italiza
tion M
eth
od
Meth
od
Asse
tsL
iab
Equit
yN
/ID
/AD
/EL
TD
/ER
OA
RO
E
ILW
-91
0.9
%1.4
%-1
.6%
0.5
%3.0
%3.4
%-0
.9%
1.6
%
ILW
-91*
1.0
%1.5
%-1
.6%
0.5
%3.2
%3.6
%-1
.0%
1.7
%
ILW
-93
5.1
%6.0
%0.9
%6.0
%-4
.8%
ILW
-97
1.2
%1.7
%-1
.5%
-15.9
%0.5
%3.3
%3.7
%-1
6.8
%-1
4.6
%
ILW
-97*
1.6
%1.9
%0
.0%
0.0
%0.3
%1.9
%2.4
%-1
.6%
0.0
%
FK
-01
1.9
%1.9
%1
.5%
16.0
%0.1
%0.4
%1.0
%13
.8%
14.2
%
Journal of Finance and Accountancy
Effects of lease capitalization, Page 10
FK
-01
1.9
%1.9
%1
.5%
16.0
%0.1
%0.4
%1.0
%13
.8%
14.2
%
EM
FZ
H-0
91.7
%1.9
%0
.5%
5.4
%0.2
%1.3
%1.9
%3.7
%4.8
%
Avg C
hange
1.9
%2.3
%-0
.4%
1.4
%0.4
%2.7
%2.7
%-1
.1%
1.3
%
Ta
ble
5:
Pfi
zer-
Pe
rcen
tag
e C
ha
ng
e i
n K
ey
Me
asu
res b
y L
ea
se C
ap
ita
liza
tio
n M
eth
od
Meth
od
Asse
tsL
iab
Eq
uit
yN
/ID
/AD
/EL
TD
/ER
OA
RO
E
ILW
-91
0.3
%0
.7%
-0.2
%0
.4%
0.9
%1
.0%
-0.3
%0
.2%
ILW
-91*
0.3
%0
.7%
-0.2
%0
.4%
0.9
%1
.0%
-0.3
%0
.2%
ILW
-93
1.4
%2
.4%
1.0
%2
.4%
-1.3
%
ILW
-97
0.4
%0
.9%
-0.2
%-2
.2%
0.5
%1
.1%
1.3
%-2
.6%
-2.0
%
ILW
-97*
0.3
%0
.9%
-0.6
%-5
.9%
0.6
%1
.5%
1.6
%-6
.1%
-5.3
%
FK
-01
0.7
%1
.1%
0.2
%1.8
%0
.4%
0.9
%1
.2%
1.1
%1
.6%
Journal of Finance and Accountancy
Effects of lease capitalization, Page
FK
-01
0.7
%1
.1%
0.2
%1.8
%0
.4%
0.9
%1
.2%
1.1
%1
.6%
EM
FZ
H-0
90.6
%1
.0%
0.1
%0.8
%0
.4%
0.9
%1
.1%
0.2
%0
.7%
Avg C
hange
0.6
%1
.1%
-0.2
%-1
.3%
0.5
%1
.2%
1.2
%-1
.3%
-0.8
%
Tab
le 6
: A
vera
ge
Pe
rcen
tag
e C
han
ge
s t
o K
ey
Me
asure
s b
y L
ease C
ap
itali
zati
on
Te
chn
iqu
e
Me
thod
Assets
Lia
bE
qu
ity
N/I
D/A
D/E
LT
D/E
RO
AR
OE
ILW
-91
1.6
2%
3.0
2%
-1.6
7%
1.3
6%
4.8
2%
6.0
9%
-1.5
8%
1.7
2%
ILW
-91
*1.6
4%
3.0
5%
-1.6
9%
1.3
8%
4.8
8%
6.2
0%
-1.5
9%
1.7
4%
ILW
-93
4.5
6%
6.7
6%
2.0
6%
6.7
6%
-4.2
7%
ILW
-97
2.1
4%
3.8
2%
-1.7
2%
-22.1
8%
1.6
2%
5.7
0%
7.4
0%
-23
.43
%-2
1.1
4%
ILW
-97
*1.6
1%
3.4
8%
-2.9
5%
-38.3
5%
1.8
2%
6.7
8%
8.1
9%
-38
.80
%-3
7.6
7%
FK
-01
3.1
8%
4.4
7%
0.6
9%
6.5
0%
1.2
2%
3.7
5%
5.8
5%
3.2
7%
6.6
0%
EM
FZ
H-0
92.9
4%
4.2
5%
0.2
8%
2.5
1%
1.2
4%
3.9
5%
5.9
2%
-0.3
7%
2.2
3%
Journal of Finance and Accountancy
Effects of lease capitalization, Page 11
EM
FZ
H-0
92.9
4%
4.2
5%
0.2
8%
2.5
1%
1.2
4%
3.9
5%
5.9
2%
-0.3
7%
2.2
3%
Gra
nd M
ean
2.5
3%
4.1
2%
-1.1
8%
-12.8
8%
1.5
3%
5.2
3%
6.6
1%
-9.5
4%
-7.7
5%
Sta
nd
ard
Devia
tion
1.1
1%
1.2
9%
1.3
8%
21
.20
%0
.32
%1
.23
%0
.96
%15
.55%
17
.66%
GM
witho
ut H
i/L
o2.3
1%
3.8
1%
-1.2
0%
-9.8
3%
1.4
8%
4.4
7%
6.4
0%
-6.2
5%
-3.8
6%
SD
witho
ut H
i/L
o0.7
3%
0.5
7%
0.0
2%
17
.46
%0
.26
%0
.91
%1
.11
%9
.71
%1
1.5
2%
REFERENCES
American Institute of Certified Public Accountants (AICPA).
Opinion No. 31: Disclosure of Lease Commitments by Lessees
Brown, C.S. and A.R. Wyatt. 1983. “Liabilities Belong in a Footnote
Journal of Accounting. 1
Coughlan, J. 1980. “Regulation, Rents, and Residuals”
66.
Dieter, R. 1979. “Is Lessee Accounting Working?”
Easton, P. D., M. L. McAnally, P. Fairfield, X. Zhang, and R. F. Halsey. (2009).
Statement Analysis & Valuation
Publishers.
Fahnestock, R.T. 1998. “A Qualitative Analysis of the Content of Operating Lease Disclosures”
Oil, Gas, and Energy Quarterly
Fahnestock, R.T. and C.G. King. 2001. “An Evaluation of the Impact of Constructive
Capitalization of Operating Leases on Financial Position and Results of Operations”
Journal of Accounting and Finance Research
Financial Accounting Standards Board (FASB). 1976.
Standards No. 13: Accounting for Leases
Hartman, B.P. and H. Sami. 1989. “The Impact of the Accounting Treatment of Leasing
Contracts on User Decision Making: A Field Experiment”
Volume 7. 23-35.
International Accounting Standards Board (IASB)
IFRS Foundation Publications Department. London. August.
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1991. “Operating Leases: Impact of
Constructive Capitalization”
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1993. “The Effects of Recognition Versus
Disclosure on Shareholder Risk and Executive Compensation”
Auditing, and Finance. Fall. 335
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright
Constructive Capitalization”
Lewis, C.M. and J. S. Schallheim
Financial and Quantitative Analysis
Wilkins, T. and I. Zimmer. 1983. “The Effect of Leasing and Different Methods of Accounting
for Leases on Credit Evaluations”
Wyatt, A.R. 1974. “Leases Should
Journal of Finance and Accountancy
Effects of lease capitalization, Page
d Public Accountants (AICPA). Accounting Principles Board
Opinion No. 31: Disclosure of Lease Commitments by Lessees. AICPA: New York
Brown, C.S. and A.R. Wyatt. 1983. “Liabilities Belong in a Footnote—Or Do They?”
. 1-15.
Coughlan, J. 1980. “Regulation, Rents, and Residuals” Journal of Accountancy
9. “Is Lessee Accounting Working?” The CPA Journal. August. 13
Easton, P. D., M. L. McAnally, P. Fairfield, X. Zhang, and R. F. Halsey. (2009).
Statement Analysis & Valuation, second edition. Westmont, IL: Cambridge Business
Fahnestock, R.T. 1998. “A Qualitative Analysis of the Content of Operating Lease Disclosures”
Oil, Gas, and Energy Quarterly. December. 343-358.
Fahnestock, R.T. and C.G. King. 2001. “An Evaluation of the Impact of Constructive
perating Leases on Financial Position and Results of Operations”
Journal of Accounting and Finance Research. Summer. 39-52.
ng Standards Board (FASB). 1976. Statement of Financial Accounting
Accounting for Leases. FASB: Norwalk, CT.
Hartman, B.P. and H. Sami. 1989. “The Impact of the Accounting Treatment of Leasing
Contracts on User Decision Making: A Field Experiment” Advances in Accounting
International Accounting Standards Board (IASB). 2010a. Exposure Draft ED/2010/9
IFRS Foundation Publications Department. London. August.
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1991. “Operating Leases: Impact of
Constructive Capitalization” Accounting Horizons. March. 51-63.
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1993. “The Effects of Recognition Versus
Disclosure on Shareholder Risk and Executive Compensation” Journal of Accounting,
. Fall. 335-368.
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1997. “Operating Leases: Income Effects of
Constructive Capitalization” Accounting Horizons. March. 12-32.
Schallheim. 1992. “Are Debt and Leases Substitutes?” Journal of
Financial and Quantitative Analysis. December. 497-511.
Wilkins, T. and I. Zimmer. 1983. “The Effect of Leasing and Different Methods of Accounting
for Leases on Credit Evaluations” The Accounting Review. Spring. 749
Should be Capitalized.” The CPA Journal. September
Journal of Finance and Accountancy
Effects of lease capitalization, Page 12
Principles Board
AICPA: New York.
Or Do They?” Georgia
Journal of Accountancy. February. 58-
. August. 13-19.
Easton, P. D., M. L. McAnally, P. Fairfield, X. Zhang, and R. F. Halsey. (2009). Financial
, second edition. Westmont, IL: Cambridge Business
Fahnestock, R.T. 1998. “A Qualitative Analysis of the Content of Operating Lease Disclosures”
Fahnestock, R.T. and C.G. King. 2001. “An Evaluation of the Impact of Constructive
perating Leases on Financial Position and Results of Operations”
Statement of Financial Accounting
Hartman, B.P. and H. Sami. 1989. “The Impact of the Accounting Treatment of Leasing
Advances in Accounting.
Exposure Draft ED/2010/9. Leases
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1991. “Operating Leases: Impact of
Imhoff, E.A., Jr., R.C. Lipe and D.W. Wright. 1993. “The Effects of Recognition Versus
Journal of Accounting,
. 1997. “Operating Leases: Income Effects of
Journal of
Wilkins, T. and I. Zimmer. 1983. “The Effect of Leasing and Different Methods of Accounting
. Spring. 749-764.
ember. 35-38.