Amortized Cost for Operating Lease Assets

42 Pages Posted: 4 Mar 2012 Last revised: 22 May 2012

See all articles by Ross Jennings

Ross Jennings

University of Texas at Austin - Department of Accounting

Ana Cristina Marques

Norwich Business School - University of East Anglia

Date Written: May 2, 2012

Abstract

A proposed accounting standard issued jointly by the FASB and IASB would require firms to recognize many more lease assets than is currently required and to amortize those assets on a straight-line basis. A number of respondents to the exposure draft argue that the “front-loading” of lease expense resulting from straight-line amortization would not reflect the economics of the lease assets. This study compares straight-line amortization with the most often cited alternative, present value amortization. First, we illustrate by example that under stylized conditions present value amortization provides information that more faithfully represents the future cash flows of lease assets than straight-line amortization. Second, for a large subset of firms that are more likely to conform to the stylized conditions in our example, we find that investors value those firms as though the lease assets are capitalized and amortized on a present value basis. Finally, we find that financial ratio comparability is substantially increased when operating leases are constructively capitalized and amortized using straight-line amortization, and further increased when using present value amortization. Taken together, these results provide no evidence for favoring straight-line amortization over present value amortization as the default method for amortizing capitalized operating leases.

Keywords: leasing, straight-line amortization, present value amortization, value-relevance

JEL Classification: M41

Suggested Citation

Jennings, Ross and Marques, Ana Cristina, Amortized Cost for Operating Lease Assets (May 2, 2012). Available at SSRN: https://ssrn.com/abstract=2014842 or http://dx.doi.org/10.2139/ssrn.2014842

Ross Jennings (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

Ana Cristina Marques

Norwich Business School - University of East Anglia ( email )

Norwich
NR4 7TJ
United Kingdom

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