No abstract

The purpose of this study is to investigate the economic impacts of capitalization of operating leases in Japan. Specifically, this study estimates the ex-ante impacts of capitalization of operating leases by comparing pro-forma accounting numbers based on a proposed rule change with reported accounting numbers under an extant rule. Our findings are twofold. First, capitalization of operating leases has significant impacts on financial ratios, including the debt to equity ratio (DER) and the interest coverage ratio (ICR). Second, the impacts of capitalization of operating leases on these financial ratios are more likely to be large after the adoption of Statement No. 13, Accounting Standard for Lease Transactions. This study contributes to the literature on economic consequences of capitalizing leases and discussions of global convergence of accounting standards.

No abstract

Statement No. 26, Accounting Standard for Retirement Benefits, requires Japanese firms to recognize previously off-balance sheet pension liabilities on their balance sheets. We explore auditors' responses to recognized versus disclosed pension liabilities in the Japanese audit market. We use a pre-Statement No. 26 versus post-Statement No. 26 setting to analyze the effects of disclosed versus recognized pension information on audit fees and costs. We show that disclosed pension liabilities are processed similarly to recognized previously off-balance sheet pension liabilities when audit fees are determined. However, we find that associations with audit costs differ between disclosed and recognized pension liabilities. We also find that audit costs' differential relations with disclosed and recognized pension liabilities are particularly pronounced for firms with a large pension plan deficit. Overall, our results suggest that auditors scrutinize recognized amounts more closely than disclosed financial information, thereby increasing the reliability of accounting information.

Statement No. 26, Accounting Standard for Retirement Benefits, requires Japanese firms to recognize previously off-balance sheet pension liabilities on their balance sheets. We explore auditors' responses to recognized versus disclosed pension liabilities in the Japanese audit market. We use a pre-Statement No. 26 versus post-Statement No. 26 setting to analyze whether and how disclosed versus recognized pension information affects audit fees and costs. We show that disclosed pension liabilities are processedsimilarly to recognized previously off-balance sheet pension liabilities when audit fees are determined. However, we find that associations with audit costs differ between disclosed and recognized pension liabilities. We also find that audit costs' differential relations with disclosed and recognized pension liabilities are particularly pronounced for firms with alarge pension plan deficit. Overall, our results suggest that auditors scrutinize recognized amounts more closely than disclosed financial information, thereby increasing the reliability of accounting information.