Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and <scp>UPS</scp>

Duke, Joanne C.; Franz, David P.; Hsieh, Su‐Jane

doi:10.1111/j.1911-3838.2012.00031.x

Cited by 9 publications

(4 citation statements)

References 1 publication

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“…Imhoff et al (1991) estimated the unexpired lease term as 50 per cent of the total lease term. This estimation is accepted by Bennett and Bradbury (2003), Duke and Hsieh (2006), Duke et al (2009 and2012). However, many others consider firm-specific factors to calculate the weighted, average, remaining lease term and total lease term (Beattie et al, 1998;Goodacre, 2003;Lückerath-Rovers and de Bos, 2005).…”

Section: Converting Financial Statementsmentioning

confidence: 99%

“…Imhoff et al (1991) used 70 per cent and later used 75 per cent (Imhoff et al, 1997). Others followed Imhoff et al (1991) with 70 per cent (Duke et al, 2012(Duke et al, , 2009Duke and Hsieh, 2006), while Bennett and Bradbury (2003) used 81 per cent. However, the present value of unrecorded leased assets can be specified with more accuracy for each company as long as three elements (present value of lease commitments, total lease term and unexpired lease term) are determined.…”

Section: Converting Financial Statementsmentioning

confidence: 99%

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Converting financial statements: operating to capitalised leases

Davidson

Cheong

2017

PAR

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Purpose The purpose of this paper is to examine how capitalising operating leases under IFRS 16/AASB 16 affects the financial statements and value relevance of financial information. In doing so, limitations of exiting methods are highlighted and improved upon. Design/methodology/approach Imhoff et al.’s (1991) constructive method for capitalising operating leases is improved upon and used to restate the financial statements of 165 S&P/ASX200 companies. The financial position, key ratios and value relevance are tested for significant differences. Findings The results provide evidence that capitalising operating leases affects financial statements and value relevance. Originality/value Imhoff et al.’s (1991) constructive method has been refined, providing an improved method for capitalising operating leases than the one that has been used in the past. From a practical perspective, this research provides evidence supporting the “right-of-use” method proposed by the IASB which will see previous off-balance-sheet leases recognised.

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Section: Converting Financial Statementsmentioning

confidence: 99%

Section: Converting Financial Statementsmentioning

confidence: 99%

Converting financial statements: operating to capitalised leases

Davidson

Cheong

2017

PAR

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“…The results of the study also match the viewpoints of Graham and King (2011), who found that the right-to-use leased asset value is strongly associated with current and future return on assets. Duke et al (2012) also suggested that the firms would experience a decline in retained earnings and key financial ratios, such as the debt-to-equity, return-on-assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard.…”

Section: Conclusion and Limitationsmentioning

confidence: 99%

The Impact of Lease Capitalisation on Financial Statements and Key Ratios: Evidence from Australia

Wong

Joshi

2015

AABFJ

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The IASB/FASB exposure draft ED 2013 on lease accounting, if introduced as a standard, will fundamentally change the way that leases are accounted for and reported in financial statements. This paper seeks to provide information on the proposed new lease accounting rules and to illustrate their impact on financial statements and financial ratios of leading Australian companies. The study follows the method of constructive capitalisation developed by Imhoff et al. (1991) to demonstrate the potential impact of the new rules on financial ratios and financial statements. The results show that financial statements will change significantly when all lease assets and liabilities are capitalised. The study finds that lease capitalisation will have a material impact on the reported numbers in the balance sheet and income statement and result in significant changes to return and leverage ratios. A comparison between positive and negative income subgroups also shows significant changes in the financial ratios of both these subgroups. This is the first Australian study that serves to provide computations of the effects on financial reporting changes in lease accounting standard. The results have practical implications for corporate managers and accounting practitioners in planning and formulating strategies to lessen the impact of this important change in lease accounting.

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“…The arguments for effects of leasing on the financial performance of a company have focused mainly on four elements including tax differential, debt substitutability, agency costs and free cash flows. Duke et al (2012) studied the effect of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examined the effect of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard.…”

Section: Empirical Reviewmentioning

confidence: 99%

Lease Financing and Profitability: Evidence From Nigerian Quoted Conglomerates

Atseye

Mboto²,

Lawal³

2020

IJEFI

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The paper examined the causal relationship between lease financing and profitability of Nigerian quoted conglomerates for the period spanning 2012-2017. The study focused on 6 conglomerates that are quoted on the Nigerian Stock Exchange as at 2017. Data were collated from published accounts of the affected companies. Data were analysed using descriptive and pooled ordinary least square multiple regression statistics. Unit root test was conducted using Augmented Dickey-Fuller. Estimated panel results indicated a negative and insignificant impact of fixed assets turnover on return on assets (ROA), lease financing (LFN) had a positive and insignificant impact on ROA, and long-term debt ratio had a negative and insignificant impact on ROA. Firm size was used to control possible problem of non-linearity and heteroscedasticity. Based on these findings, leasing option was recommended as one of the sources of debt financing to boost the capital of Nigerian conglomerates to enable them to absorb losses, multiply fixed assets and grow continuously, thus providing employment and income in terms of tax revenue, profits, dividends, and wages and salaries to households for national growth and development.

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Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

Cited by 9 publications

References 1 publication

Converting financial statements: operating to capitalised leases

Converting financial statements: operating to capitalised leases

The Impact of Lease Capitalisation on Financial Statements and Key Ratios: Evidence from Australia

Lease Financing and Profitability: Evidence From Nigerian Quoted Conglomerates

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