The valuation and reliability implications of FIN 46 for synthetic lease liabilities

Callahan, Carolyn M.; Smith, Rod; Spencer, Angela Wheeler

doi:10.1016/j.jaccpubpol.2013.04.002

Cited by 28 publications

(23 citation statements)

References 27 publications

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“…Callahan et al. () capitalise synthetic lease liabilities in the period before FIN 46 and compare their market valuation with capitalised leases after the adoption of the new standard . They find that the value relevance of the liabilities increased after its adoption; in their view reliability also increased due to the enhanced transparency associated with the new accounting treatment.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

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The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

Inchausti

Pardo

2018

Australian Accounting Review

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The new IASB and FASB models for leases aim to improve the quality of financial reporting. To this end, both standard setters impose the recognition of assets and liabilities for operating leases. Meanwhile, preparers have been strongly lobbying against these changes, as in their view the new treatment will lead to negative economic consequences. We undertake a value-relevance study to examine whether as-if capitalised operating leases are priced by market users in a relatively unexplored setting. We consider Spanish listed firms, and employ handcollected data on operating leases disclosed in the notes to the financial statements to constructively capitalise the assets and liabilities. Our analysis suggests that investors in code-law countries with less developed markets and low enforcement quality do not behave any differently to those in common-law countries that have more developed markets and stricter enforcement policies. Investors equally value recognised debts and operating lease liabilities resulting from information in the notes in retail sectors. In our view, these results could provide some comfort to managers in the most affected industries, as they suggest the change will not have a major impact on the stock exchange.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…Callahan et al. (), who constructively capitalise synthetic lease liabilities in the period preceding FIN 46, compare their market valuation with capitalised leases after FIN 46. These studies conclude that market participants pay more attention to recognised items than disclosed information.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

Inchausti

Pardo

2018

Australian Accounting Review

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“…Botosan, 1997;Botosan and Plumlee, 2002 among others) shows that increased disclosure has a positive (decreasing) impact on firm cost of capital. Further, Callahan, Smith, and Smith (2012b) document an increase in reliability associated with adoption of FIN 46and Chang, Fernando, and Liao. (2009) find that SOX is associated with positive effects on cost of capital.…”

Section: H1: Maximum Risk Disclosures Made Under Fin 46 Are Value Relmentioning

confidence: 97%

Risk Implications of Increased Off-Balance Sheet Disclosure: The Case of FIN 46 and SOX

Callahan

Spencer

2012

AFR

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This study investigates the impact of increased disclosures required by Financial Accounting Standards Board Our results indicate that the maximum risk disclosures required under FIN 46 were only marginally priced, although differences exist across type of VIE and whether the structure was ultimately consolidated. Further, while all firms experienced decreases in idiosyncratic risk around this time of increasing regulatory scrutiny and upon adoption of SOX, only the off-balance sheet disclosures required by FIN 46 appear to have significantly altered firm idiosyncratic risk beyond the general provisions of SOX. Our study has implications for accounting regulators determined to design effective investor protection regulation.

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“…In addition, examining whether disclosed information is processed differently from recognized amounts using operating leases requires constructively capitalizing operating lease obligations using future minimum lease payments. Since the assumptions underlying lease arrangements and the parameter estimates affect the estimated amounts, measurement errors concerning constructively capitalized leases could occur, affecting the investigation of recognition versus disclosure (Bratten et al, 2013;Callahan et al, 2013). For instance, Bratten et al (2013) find that the remaining lease contract lifetime has substantial effects on the measurement errors of operating lease obligations.…”

Section: Prior Studiesmentioning

confidence: 99%

“…Finally, my research provides novel insights into differing credit risk assessments of recognized versus disclosed lease arrangements. Prior studies suggest that measurement error concerning constructively capitalized leases causes investors' differential treatments between recognition and disclosure (Bratten et al, 2013;Callahan et al, 2013).…”

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confidence: 99%

Recognition versus disclosure of finance leases: Evidence from Japan

Kusano

2019

Business Fin & Account

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This study examines whether credit market participants—bond investors and credit rating agencies—treat recognized and disclosed finance leases differently when assessing firms’ credit risk in Japan. I use firms’ credit risk, measured by bond spreads and credit ratings, to investigate the relations between recognized versus disclosed finance lease obligations and firms’ credit risk following the adoption of Statement No. 13, Accounting Standard for Lease Transactions. For a sample of firms issuing new bonds, I find that, unlike recognized finance leases, disclosed finance leases are not associated with bond spreads. Moreover, the associations between recognized versus disclosed finance leases and bond spreads are substantially different. Conversely, recognized and disclosed finance leases are associated with credit ratings and are processed similarly when credit ratings are determined. Taken together, my results suggest that the sophistication of capital market participants influences their credit risk assessments of recognized versus disclosed finance leases.

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The valuation and reliability implications of FIN 46 for synthetic lease liabilities

Cited by 28 publications

References 27 publications

The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16

Risk Implications of Increased Off-Balance Sheet Disclosure: The Case of FIN 46 and SOX

Recognition versus disclosure of finance leases: Evidence from Japan

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