Assessing the potential impact of lease accounting reform: a review of the empirical evidence*

Abstract

SummaryAccounting standard-setters have proposed that the right to use assets (including land and buildings) acquired under operating lease contracts should be recognised on the balance sheet of lessee companies. In recent years, several empirical research studies have investigated the potential impact of the proposed changes in accounting for leases. The current paper reviews this work and presents some new evidence, for a property audience.The paper summarises evidence that operating leases represent a major source of finance for many companies generally, and more specifically for companies in the retail sector. Recognition of operating leases on the lessee's balance sheet would have a significant impact on performance measures, especially gearing. If markets are informationally 'efficient' such changes should have little impact. However, research evidence on efficiency with respect to lease accounting information is mixed. What's more, company managers do not believe that the market is efficient so are likely to behave as if the markets are 'inefficient'. Possible reactions include reduced use of leasing, shorter lease contract terms, more break clauses, or increased use of contingent rental agreements. It seems likely that lessors will be under pressure to bear greater risks.

An Extensive Comparison of Operating-Lease Capitalisation Approaches and Their Unavoidable Assumptions: Are Further Disclosures Desirable?

“…They do acknowledge, however, the non-normal distribution of many ratios (see footnote on p.245), and mention that the Wilcoxon nonparametric test produced results of greater significance. Goodacre (2001) conducted a similar study based on the Beattie study, and focussed on the differences in medians and the significance according to the Wilcoxon-test instead of the paired t-test. Bennet and Bradbury (2003) report only descriptive values of mean and median, and do not perform a statistical test of significance in differences.…”

“…The sample of Beattie et al (1998) consisted of 16% non-leasing companies. Imhoff et al (1995) and Goodacre (2001) make no mention of the elimination of non-leasing companies, and they are presumably included. 3.…”

Accounting for leases – the problem of rent reviews in capitalising lease liabilities

“…They believe that this concept is difficult to achieve in respect of property leases. Goodacre (2001) suggests that a number of features of property leases`c reate difficulties for accountants, in particular, break clauses, renewal options, contingent rental and rent reviews''. In addition to the long leases with reviews, UK leases often contain breaks and occupiers have the right to renew leases so many of these issues are of more concern to the UK than other G4 + 1 countries.…”

“…The distinction between finance and operating leases is one such issue and is fully discussed in Goodacre (2001) who identifies that the current lease accounting standard is SSAP 21. A lease which transfers substantially all of JPIF 21,2 80 the risks and rewards of ownership to the lessee is a finance lease while a lease that does not transfer substantially all of the rights and rewards is termed an operating lease.…”

Effects of IFRS 16 on Key Financial Ratios of Spanish Companies

“…Several studies have analyzed the possible effect that capitalization of the operating leases maintained by companies could have on balance sheet, solvency and profitability ratios: Bennett & Bradbury, 2003;Duke, Hsieh, & Su, 2009;Durocher, 2008;Fitó, Moya, & Orgaz, 2013;Fülbier, Silva, & Pferdehirt, 2008;Goodacre, 2003;Grossman & Grossman, 2010;Imhoff Jr. & Lipe, 1991, 1997Mulford & Gram, 2007;Singh, 2012. However, these studies were conducted before the final version of IFRS 16/Topic 842 was issued, and therefore there were differences compared to the final version of the standards in aspects such as the estimation of future lease payments and discount rates (see Morales-Díaz & Zamora-Ramírez, 2018).…”