The Effects of Lease Capitalization on Various Financial Measures: An Analysis of the Retail Industry

Journal of Applied Research in Accounting and Finance, Vol. 2, No. 2, pp. 3-13, 2007

15 Pages Posted: 6 Feb 2008

See all articles by Charles W. Mulford

Charles W. Mulford

Georgia Institute of Technology - Accounting Area

Mark Gram

Georgia Institute of Technology - Scheller College of Business

Abstract

The FASB, in conjunction with the International Accounting Standards Board, is currently in the planning stages of a project that would revise SFAS 13, Accounting for Leases. What is proposed is that leases that are presently accounted for as operating leases, that is, those leases that do not meet the current requirements for on-balance-sheet treatment, would be accounted for as capital leases and brought onto the financial statements. For companies that use a significant amount of operating leases to finance operations, the financial statement impact could be far-reaching, including material effects on various measures of profitability, financial leverage, debt coverage and cash flow.

In this article, we look at the retail industry, an industry that uses operating leases extensively, to evaluate how certain key measures of financial performance and position might be affected by the capitalization of operating leases. Among the findings are an increase in EBITDA, though reductions in income from continuing operations and earnings per share. Financial leverage is increased and debt coverage measures are reduced. Measures of profitability, such as return on assets and return on equity are reduced. Finally, we find an increase in operating cash flow and free cash flow.

Keywords: Lease Capitalization, Retail Industry, financial performance

JEL Classification: M40, M41

Suggested Citation

Mulford, Charles W. and Gram, Mark, The Effects of Lease Capitalization on Various Financial Measures: An Analysis of the Retail Industry. Journal of Applied Research in Accounting and Finance, Vol. 2, No. 2, pp. 3-13, 2007 , Available at SSRN: https://ssrn.com/abstract=1090463

Charles W. Mulford (Contact Author)

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Mark Gram

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St., NW
Atlanta, GA 30308-1149
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,055
Abstract Views
7,305
Rank
14,343
PlumX Metrics