Bringing Leased Assets onto the Balance Sheet
Kimberly Rodgers Cornaggia
American University - Kogod School of Business
Loyola Marymount University
Timothy T. Simin
Pennsylvania State University
June 15, 2013
Journal of Corporate Finance 22, 345-360.
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.
Number of Pages in PDF File: 44
Keywords: Accounting performance, Capital structure, Financial risk, Lease financing, Off-Balance-Sheet, Risk metrics
JEL Classification: G32, M41, M48
Date posted: September 21, 2010 ; Last revised: March 18, 2014
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