An Extensive Comparison of Operating-Lease Capitalisation Approaches and Their Unavoidable Assumptions: Are Further Disclosures Desirable?
40 Pages Posted: 30 May 2009 Last revised: 1 Oct 2009
Date Written: May 29, 2009
Abstract
Previous research of Imhoff, Lipe and Wright (1991), Beattie, Edwards and Goodacre (1998) and others has shown that the capitalisation of operating leases on the balance sheet has a major impact on the accounting ratios. This empirical study expands previous research on two issues. First, we refine the capitalisation methods that have been developed by previous researchers. Second, we expand the focus from the relevance criteria of operating-lease information to the completeness-criterion of decision-making usefulness as defined by the Conceptual Frameworks. The results show that in our dataset of Dutch non-financial listed companies during the period 2000-2004 only a small part did not report operating leases. Of the remaining companies, a major part (minimum 36%) did not comply with the accounting standards. The information is therefore not only incomplete, but also impractical in terms of facilitating a fair comparison with other companies. For the companies reporting operating leases, the operating leases appear to be meaningful and relevant. Also the information is essential when comparing companies. Further we conclude that the information required by the accounting standards is not complete while financial statement analysis is sensitive to assumptions with regard to discount rates, total and remaining lives. Also the different capitalisation approaches lead to significantly different capitalisation results. Based on our results we advise standard setters to require further disclosures in the notes.
Keywords: leasing, disclosure
JEL Classification: M41, M45
Suggested Citation: Suggested Citation