Decision Usefulness of Whole-Asset Operating Lease Capitalizations

45 Pages Posted: 12 Feb 2013

See all articles by Roger C. Graham

Roger C. Graham

Oregon State University

Raymond D. King

University of Oregon - Department of Accounting

Date Written: February 1, 2013

Abstract

Monson (2001) and Hepp and Scoles (2012) argue that some leased assets should be capitalized at the assets’ purchase price (whole-asset value) rather than at the present value of future minimum lease payments (right-of-use asset value). The argument is based in part on the notion that the assets under lease generate future income not the obligation related to future lease payments. To test the notion we compare associations between capitalizations representing whole asset values and current and future return on assets (ROA) and return on equity (ROE) with capitalizations representing right-of-use asset values and current and future ROA and ROE. Our results indicate that the whole-asset annuity values are incrementally associated with future ROA and ROE over right-of-use asset values. We interpret our results suggest that the current practice of capitalizing future lease payments does not fully reflect the income generation provided by leased assets.

Keywords: lease accounting, minimum lease payments, return on assets, return on equity, right-of-use, whole-asset

JEL Classification: M41

Suggested Citation

Graham, Roger C. and King, Raymond D., Decision Usefulness of Whole-Asset Operating Lease Capitalizations (February 1, 2013). Available at SSRN: https://ssrn.com/abstract=2215877 or http://dx.doi.org/10.2139/ssrn.2215877

Roger C. Graham (Contact Author)

Oregon State University ( email )

424 Austen Hall
Corvallis, OR 97331
United States
541-737-4028 (Phone)
541-737-4890 (Fax)

Raymond D. King

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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