Bringing Leased Assets onto the Balance Sheet
44 Pages Posted: 21 Sep 2010 Last revised: 18 Mar 2014
Date Written: June 15, 2013
Abstract
Pending changes in lease accounting standards will require firms to recognize obligations that have historically been kept off-balance-sheet (OBS). We examine the implications of this accounting treatment for a host of common risk and performance metrics. Conventional leverage, Z-Score, levered beta, return on capital and other asset utilization measures underestimate risk and overstate performance of firms relying heavily on OBS leasing. The distortion affects relative rankings as well as average levels and has increased over time. Proposed changes in reporting standards aim to mitigate future distortion, but necessitate adjustments for time-series comparisons. Under current reporting standards, investors, analysts, and researchers can estimate leased asset value and adjust accounting-based metrics to better reflect these fixed costs.
Keywords: Accounting performance, Capital structure, Financial risk, Lease financing, Off-Balance-Sheet, Risk metrics
JEL Classification: G32, M41, M48
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Relation Between Voluntary Disclosure and Financial Reporting: Evidence from Synthetic Leases
-
The Relation Between Voluntary Disclosure and Financial Reporting: Evidence from Synthetic Leases
-
The Determinants of Synthetic Lease Financing and the Impact on the Cost of Future Debt