The Valuation and Disclosure Implications of FIN 46 for Synthetic Leases: Off-Balance Sheet Financing of Real Property

Abstract:     
This study examines whether the differential disclosure and recognition requirements imposed by FIN 46 to improve transparency impact market valuation. We focus on the valuation impact of Financial Interpretation Number (FIN) 46 on firms that disclosed involvement as a synthetic lessee via the use of a variable interest entity (VIE) post-FIN 46. Synthetic leasing is our setting because contrasting the disclosures required for these leases as off-balance sheet operating leases before FIN 46 with the change to a capitalized presentation of these same leases after adoption of FIN 46 presents a unique opportunity to examine differences between financial statement recognition and disclosure. The results indicate that while disclosed future minimum lease payments are significantly valued by the market both pre- and post-FIN 46, lease liabilities recognized within the body of the financial statements are valued with substantially greater weight. Further, the new maximum risk disclosures required under FIN 46 are also valued by the market.

Number of Pages in PDF File: 48

Keywords: Financial Disclosure, Valuation, Leases

JEL Classification: M41, M44, M45, G14

working papers series