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The economic implications of the earnings impact from lease capitalization

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  • Hsieh, Su-Jane
  • Su, Yuli

Abstract

We observe a substantial earnings impact from capitalizing the operating leases for firms on Compustat over 1996–2010. This earnings impact is derived from the disclosed lease information and is similar to the earnings difference that arises from applying the accelerated versus the straight-line model, two alternative models proposed by the Financial Accounting Standards Board and the International Accounting Standards Board (the Boards) in 2013 to account for lease expense for lessees. Our focus is on the economic implications of this earnings impact. Applying a one-year cash flow prediction model, we observe a significant relationship between the negative impact and future operating cash flows. Using a return-earnings model, we find that both negative and positive impacts possess an incremental explanatory power for contemporaneous stock returns beyond reported earnings. Our findings provide timely empirical evidence for the Boards to evaluate two alternative models for lessees' expenses as they are in the midst of redeliberations of accounting for leases.

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  • Hsieh, Su-Jane & Su, Yuli, 2015. "The economic implications of the earnings impact from lease capitalization," Advances in accounting, Elsevier, vol. 31(1), pages 42-54.
    • Handle: RePEc:eee:advacc:v:31:y:2015:i:1:p:42-54
    DOI: 10.1016/j.adiac.2015.03.003
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    Cited by:

    1. Ron van Kints, R.E.G.A. & Louis Spoor, L.L., 2019. "Leases on balance, a level playing field?," Advances in accounting, Elsevier, vol. 44(C), pages 3-9.
    2. Francesco Bellandi, 2021. "Aircraft Wet Leases: Accounting Dissonance with Competitive Strategy and Travelers’ Perspectives," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(11), pages 214-214, July.
    3. George-Aurelian Tudor, 2022. "Leasing As A Form Of Financing In Romania. From Theory To Practice," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 3, pages 91-102, June.

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