Proposed Changes in Lease Accounting and Private Business Bankers' Credit Decisions*

Durocher, Sylvain; Fortin, Anne

doi:10.1506/ap.8.1.2

Cited by 16 publications

(4 citation statements)

References 40 publications

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“…The results of this research suggests that the IFRS 16 lease accounting change will have a significant positive influence on the quality of investment financing decision-making and more consensus among professionals regarding the treatment of lease obligations. This is consistent with evidence found by Wilkins and Zimmer (1983) and Durocher and Fortin (2009) which shows that the capitalization of operating leases improves bankers' ability to evaluate lessees' long-term commitments. Furthermore, our results are congruent with Gross et al (2014) who indicate that changes in accounting standards change the way that key financial information is used by investors and lenders, impacting investment decisions.…”

Section: Discussion Of the Resultssupporting

confidence: 92%

“…Our research shows that if operating lease information is presented in accordance with international accounting standard IFRS 16, it has a significant positive influence on the quality of decision-making by the professional users (investors, analysts, etc.) and validates existing theory on this subject, as provided by Wilkins and Zimmer (1983), Durocher and Fortin (2009), Gross et al (2014), Lin et al (2013), Spencer and Webb (2015) and Paik et al (2015).…”

Section: Discussionsupporting

confidence: 86%

“…They found that lenders, credit rating agencies and other market participants generally have an adequate understanding of off-balance sheet leases and consider them in their decision-making. On the other hand, Durocher and Fortin's (2009) findings reveal that bankers give significantly more consideration to information regarding capital leases than to information regarding operating leases when analysing loan requests. Their research reveals the bankers' beliefs that the capitalization of operating leases will improve their ability to evaluate lessees' long-term commitments and increase their estimates of the risks involved in providing financing to lessees.…”

Section: Literature Reviewmentioning

confidence: 93%

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Leases on balance, a level playing field?

Kints

Spoor

2019

Advances in Accounting

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Due to changes in lease agreements accounting standards, firms will soon have to recognize operating lease obligations that historically have been kept off-balance sheets (OBS). Research indicates that this change will have substantial effects on the presentation of the financial position and results of firms involved. It is also expected that this will affect decision-making by stakeholders such as boards, managers, bankers and financial analysts. Although it is assumed that these professionals consider all relevant information, it is also known that the smaller the chance of relevant information being overlooked, the better the decision-making. In this study we examine whether IFRS 16 has that positive effect. The results from this research suggest that the accounting treatment under IFRS 16 contributes to the quality but not necessarily to the ease of making investment financing decisions. that determining lease expenses based on capital leases is more economical for market participants. Although research (Graham & King, 2013) indicates that some leased assets should be capitalized at the assets' purchase price (whole asset value), current practice is that leased assets are capitalized at the present value of future minimum lease payments (right-of-use asset value). From January 1, 2019, companies will be compelled to comply with the introduction of IFRS 16 to capitalize their operating lease liabilities. This change may play an important role in the quality of investment financing decision-making based on that information. The International Accounting Standards Board (IASB) is fully convinced of the importance of this role, as evidenced by their decision to adapt the prevailing International Financial Reporting Standards. Hans Hoogervorst, IASBchairman, explains the new requirements: "These new accounting requirements bring lease accounting into the 21 st century, ending the guesswork involved when calculating a company's often-substantial lease obligations. The new standard will provide much-needed transparency on companies' lease assets and liabilities, meaning that off-balance sheet lease financing will no longer be lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy." According to earlier research by Cornaggia et al. (2013), Singh (2012) and Wicker and Young (2011), it can be expected that the change in rules will influence the evaluation of financial ratios of leasing firms. Similarly, Hales, Venkataraman, and Wilks (2012) argue

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Section: Discussion Of the Resultssupporting

confidence: 92%

Section: Discussionsupporting

confidence: 86%

Section: Literature Reviewmentioning

confidence: 93%

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Leases on balance, a level playing field?

Kints

Spoor

2019

Advances in Accounting

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“…For instance, using lease arrangements, prior literature analyzes whether bankers and analysts consider disclosed information when making decisions, and whether they process disclosed items in notes similarly with recognized obligations in financial statements (e.g., Durocher & Fortin, 2009;Gopalakrishnan & Parkash, 1996;Krische, Sanders, & Smith, 2014;Munter & Ratcliffe, 1983;Nelson & Tayler, 2007;Wilkins & Zimmer, 1983a, 1983b.…”

Section: Prior Literaturementioning

confidence: 99%

Effect of capitalizing operating leases on credit ratings: Evidence from Japan

Kusano

2018

Journal of International Accounting, Auditing and Taxation

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The purpose of this study is to examine the effects of constructively capitalizing operating leases on credit ratings in Japan. In particular, this study investigates whether and how a credit rating agency considers operating lease information when determining credit ratings. First, this study shows that constructively capitalized operating leases are associated with credit ratings. Second, this study finds that the associations between credit ratings and operating leases versus finance leases are not substantially different. However, when operating lease disclosures are less reliable, this study finds that operating leases are not associated with credit ratings and that the risk relevance of operating leases is substantially different from that of finance leases. This study reports that the reliability of accounting information has significant effects on the risk relevance of operating leases. These results indicate that a credit rating agency considers operating lease information in determining credit ratings to the extent that this information is reliable. This study contributes to the literature on the usefulness of operating lease disclosures and to the discussions on the global convergence of accounting standards. JEL Classification: M41, M48

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Lease Accounting Literature Review and Hypotheses Development

Raoli

2021

IFRS 16 and Corporate Financial Performance in Italy

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Proposed Changes in Lease Accounting and Private Business Bankers' Credit Decisions*

Cited by 16 publications

References 40 publications

Leases on balance, a level playing field?

Leases on balance, a level playing field?

Effect of capitalizing operating leases on credit ratings: Evidence from Japan

Lease Accounting Literature Review and Hypotheses Development

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