Proposed Lease Accounting Changes

2010 ◽  
Vol 36 (3) ◽  
pp. 335-365 ◽  
Author(s):  
Amrik Singh
Keyword(s):  
Small Firms ◽  
Restaurant Industry ◽  
Financial Ratios ◽  
Operating Leases ◽  
Restaurant Firms ◽  
Relative Differences ◽  
Accounting Changes ◽  
Industry Sectors ◽  
The Impact ◽  
Lease Accounting

Regulators have proposed changes to the existing lease accounting rules that will require the capitalization of all operating leases as assets and liabilities. This study investigated the impact of operating lease capitalization on the financial statements and 11 financial ratios in restaurant and retail firms from 2006 to 2008. Significant absolute and relative differences were found across and within the two industries. All 11 financial ratios related to interest coverage, leverage, and profitability will change significantly and dramatically for both industry sectors. The findings indicate that retail firms will be affected to a greater extent than restaurant firms. Within the restaurant industry, small restaurant firms will face significantly higher debt-related ratios than medium or large restaurant firms. Reconciling previous research, this study found firm size to be an important factor in explaining operating lease usage with small firms likely to use more operating leases than large firms. Restaurant and retail firms should evaluate the impact of the proposed standard on debt agreements and executive compensation contracts and plan for operating under the new rules.

The Relation between Accounting Information in Debt Covenants and Operating Leases

2015 ◽  
Vol 29 (4) ◽  
pp. 969-996 ◽  
Author(s):  
Daniel Gyung H. Paik ◽  
Joyce A. van der Laan Smith ◽  
Brandon Byunghwan Lee ◽  
Sung Wook Yoon
Keyword(s):  
Balance Sheet ◽  
Accounting Information ◽  
Debt Covenants ◽  
Debt Contracts ◽  
Debt Contracting ◽  
Income Statement ◽  
Operating Leases ◽  
The Impact ◽  
Accounting Ratios ◽  
Lease Accounting

SYNOPSIS Proposed changes by the FASB and the IASB to lease accounting standards will substantially change the accounting for operating leases by requiring the capitalization of future lease payments. We consider the impact of these changes on firms' debt covenants by examining the frequency of income-statement- versus balance-sheet-based accounting ratios in debt covenants of firms in high and low Off Balance Sheet (OBS) lease industries. Based on debt contracts from the 1996–2009 period, our results provide evidence that lenders focus on balance sheet (income statement) ratios in designing debt covenants for borrowers in low (high) OBS lease industries. Further, the use of balance-sheet- (income-statement-) based covenants falls (rises) faster in high OBS lease industries than in low OBS lease industries as the use of OBS leasing increases. This evidence indicates that OBS operating leases influence lenders' use of accounting information in covenants, suggesting that creditors consider the impact of OBS leases when structuring debt agreements. These results also suggest that the proposed capitalization of OBS leases may not result in firms violating loan covenants but will make the balance sheet a more complete source of information for debt contracting by removing the need for constructive capitalization of OBS leases.

The impact of board composition on firm performance in the restaurant industry

2017 ◽  
Vol 29 (8) ◽  
pp. 2121-2138 ◽  
Author(s):  
Sujin Song ◽  
Hubert B. Van Hoof ◽  
Sungbeen Park
Keyword(s):  
Firm Performance ◽  
Restaurant Industry ◽  
Operational Performance ◽  
Board Members ◽  
Board Composition ◽  
Stewardship Theory ◽  
Outside Directors ◽  
Content Type ◽  
Restaurant Firms ◽  
The Impact

Purpose This study aimed to investigate the impact of the board composition on financial performance in the restaurant industry from a stewardship theory perspective. Design/methodology/approach The composition of board was measured as the ratio of inside and outside directors. Firm performance was operationalized as return on assets (operational performance) and Tobin’s q (market-based performance). Panel regression analysis tested the research hypotheses. Findings Using data from 25 restaurant firms from 2007 to 2013, the study found an insignificant impact of board composition on operational performance. However, a higher proportion of inside board members increases market-based performance. A higher proportion of outside board members decreases market-based performance. Practical implications Supporting the basic tenets of stewardship theory, restaurant companies may consider changing the current practice of having a super-majority of outside directors and increase the inside board members. Because inside board member have greater experience with the organization and the industry, they have a better understanding of the status quo and are better able to respond to opportunities and threats in the environment. Originality/value Considering the scarcity of research on how the board composition affects firm performance in the hospitality context, the present study is a forerunner in its exploration of the impact of inside and outside directors on restaurant firms’ performance.

A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases

2011 ◽  
Vol 25 (4) ◽  
pp. 861-871 ◽  
Author(s):  
Yuri Biondi ◽  
Robert J. Bloomfield ◽  
Jonathan C. Glover ◽  
Karim Jamal ◽  
James A. Ohlson ◽  
...  
Keyword(s):  
Balance Sheet ◽  
Accounting Standards ◽  
Financial Accounting ◽  
International Accounting Standards ◽  
Financial Accounting Standards Board ◽  
Operating Leases ◽  
Key Issues ◽  
Definition Of ◽  
The Impact ◽  
Lease Accounting

SYNOPSIS The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) recently issued a joint exposure draft on accounting for leases. This exposure draft seeks to shift lease accounting from an “ownership” model to a “right-of-use” model. Under the current ownership model, leases can be reported on balance sheet (finance leases) if certain tests are met, or off balance sheet (operating leases) if those tests are not met. The new model seeks to report all leases on the balance sheet based on the present value of lease obligations without any bright line tests, and no sharp on or off the balance sheet classifications. We are sympathetic to the standard setters' concern that the current lease standard is being manipulated improperly by managers, resulting in large amounts of debt being reported off balance sheet. We provide a discussion of current lease accounting and the proposed exposure draft. We also comment on five key issues covered by the exposure draft: the definition of a lease, the initial measurement and eventual reassessment at fair values, the accounting for lessors, the impact of lease accounting on recognition and income measurement, and classification of lease accounting elements and their impact on accounting ratios. JEL Classifications: M40.

scholarly journals The Joint FASB/IASB Lease Project: Discussion And Industry Implications

2011 ◽  
Vol 9 (9) ◽  
pp. 29 ◽  
Author(s):  
John Kostolansky ◽  
Brian Stanko
Keyword(s):  
Balance Sheet ◽  
Accounting Standards ◽  
Financial Accounting ◽  
International Accounting Standards ◽  
Financial Accounting Standards Board ◽  
Font Size ◽  
Operating Leases ◽  
Accounting Rules ◽  
The Impact ◽  
Lease Accounting

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">Over several decades, the Financial Accounting Standards Board and International Accounting Standards Board have enacted numerous changes to the controversial lease accounting rules. As currently prescribed, operating leases are treated as rental arrangements whereby the lessee does not record a liability - a situation generally referred to as off-balance sheet financing. In an attempt to increase transparency and comparability, the FASB and IASB will soon require all leases to be capitalized. This paper quantifies the impact of the new leasing standard on the financial statements and ratios of the firms and industries represented in the S&amp;P 100 under a variety of discount rates. </span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

scholarly journals The effects of listing status on a firm’s lease accounting: Evidence from South Korea

2017 ◽  
Vol 19 (1) ◽  
pp. 77
Author(s):  
Younghee Park ◽  
Kyunga Na
Keyword(s):  
South Korea ◽  
Empirical Evidence ◽  
Balance Sheet ◽  
Listed Firms ◽  
Current Accounting ◽  
Operating Leases ◽  
The Impact ◽  
Lease Accounting ◽  
Unlisted Firms ◽  
Debt Levels

This study examines how the listing status affects a firm’s choice of lease accounting, using 7,023 firm-year observations that record either an operating or a capital lease from 2001 to 2013 in Korea. We find that unlisted firms are more likely to opt for operating leases, and to have a higher ratio of operating leases than listed firms are. These results indicate that unlisted firms tend to prefer operating leases which can be used as a tool to avoid increasing debt levels and to benefit from off-balance sheet financing (or unrecorded liabilities), compared to listed firms. This study contributes to the current accounting literature as it is the first to provide empirical evidence regarding the impact of the listing status on a firm’s lease accounting.

Examining the determinants of long-term debt in the US restaurant industry

2017 ◽  
Vol 29 (5) ◽  
pp. 1501-1520 ◽  
Author(s):  
Kwanglim Seo ◽  
Ellen Eun Kyoo Kim ◽  
Amit Sharma
Keyword(s):  
Cash Flow ◽  
Boards Of Directors ◽  
Restaurant Industry ◽  
Growth Opportunities ◽  
Content Type ◽  
Financing Decisions ◽  
The Us ◽  
Restaurant Firms ◽  
The Impact

Purpose This paper aims to find alternative explanations for the use of long-term debt in the US restaurant industry from a behavioral perspective. The three-fold purpose of the present study is to examine the impact of CEO overconfidence on the use of long-term debt; explore how CEO overconfidence moderates the relationship between growth opportunities and long-term debt; and analyze the moderating role of CEO overconfidence based on cash flow levels in the context of the restaurant industry. Design/methodology/approach Using a sample of publicly traded US restaurant firms between 1992 and 2015, this study used generalized methods of moments with instrumental variable technique to analyze the panel data. Findings The findings of this study highlight the importance of considering behavioral traits of CEOs, such as overconfidence to better understand the US restaurant firms’ financing behaviors. This study found that overconfident CEOs tend to use more long-term debt when firms have greater growth opportunities and low cash flow. Practical implications Given that psychological and behavioral features of CEOs are critical in understanding the variations in corporate financing decisions and capital structure, shareholders and boards of directors of growth-seeking restaurant firms should incorporate the behavioral aspects of overconfident CEOs in the design of long-term debt contracts to mitigate liquidation risk while developing compensation practices that encourage overconfident CEOs to finance growth. Originality/value Despite its heavy reliance on long-term debt in the US hospitality industry, prior studies provided mixed findings for the determinants of long-term debt. This study makes a contribution to the literature by offering alternative approaches to examining long-term debt decisions among US restaurant firms.

scholarly journals Capitalisation of operating lease and its impact on firm’s financial ratios: Evidence from Italian listed companies

2018 ◽  
Vol 15 (3-1) ◽  
pp. 152-162 ◽  
Author(s):  
Roberto Maglio ◽  
Valerio Rapone ◽  
Andrea Rey
Keyword(s):  
Balance Sheet ◽  
Listed Companies ◽  
Financial Accounting ◽  
Financial Ratios ◽  
Substantial Impact ◽  
Balance Sheets ◽  
Operating Leases ◽  
Accounting Rules ◽  
Profitability Ratios ◽  
Lease Accounting

Lease accounting will never be the same again. The endorsement of IFRS 16 on November 2017 sets out new rules for the recognition and measurement of the lease. The new standard removes the lessee’s distinction between operating and financial lease and it will have a substantial impact for companies have previously kept a large proportion of their financing off balance sheets. Under IAS 17 companies have exploited a financial accounting loophole by structuring lease transactions as operating leases, favouring opportunistic behaviours by managers and distorting the investors’ perception of the disclosure. IFRS 16 removes the so-called bright lines companies used to avoid capitalisation of leases and turns any attempt to hide lease liabilities off the balance sheet into a futile exercise to improve transparency of information. The purpose of this research is to analyse the potential impact of the new accounting rules on key financial ratios of Italian listed companies using a refined constructive capitalisation method. The results of the study show that the reflection of the operating leases on the balance sheet shall cause a significant increase in the assets and liabilities and for this reason, there shall be a significant effect on the main debt, liquidity and profitability ratios.

Comparing the effects of IASB Proposal on leasing: an impact assessment of EU listed Companies

2015 ◽  
pp. 17-57 ◽  
Author(s):  
Tommaso Fabi ◽  
Enrico Laghi ◽  
Marco Mattei ◽  
Alessandro Sura
Keyword(s):  
European Union ◽  
Impact Assessment ◽  
Point Of View ◽  
Financial Ratios ◽  
Stock Exchanges ◽  
European Union Countries ◽  
Equity Ratio ◽  
New Treatment ◽  
The Impact ◽  
Lease Accounting

In August 2010, the IASB and the FASB jointly released an exposure draft proposing a "right-of-use" model for the recognition of lease-related assets and liabilities. The literature shows that leasing is a relevant subject for study. Many studies have investigated the point of view of users and preparers about lease accounting. Moreover, significant studies on the impact assessment of new accounting models for leases have been conducted. The objective of this paper is to perform an impact assessment of the new standard on leases that takes into account companies listed on the main EU stock exchanges. Specifically, this paper try to estimate the magnitude of the change in some ratios that would have been produced by the new treatment with reference to 2011. The results of the paper show that the debt-to-equity ratio increased significantly and, subject to the IASB final decisions on profit or loss accounting, the EBITDA should also have increased, while ROA should not significantly be affected. Furthermore, the results show that the impact of the introduction of the IASB proposal on financial ratios will differ both among industries and among European Union countries.

scholarly journals Determining The Impact Of Capitalising Long-Term Operating Leases On The Financial Ratios Of The Top 40 JSE-Listed Companies

2013 ◽  
Vol 12 (6) ◽  
pp. 655
Author(s):  
Rikus R De Villiers ◽  
Sanlie L Middelberg
Keyword(s):  
Great Part ◽  
Balance Sheet ◽  
Financial Ratios ◽  
Current Standard ◽  
Accounting Standard ◽  
Current Accounting ◽  
Operating Leases ◽  
Top 40 ◽  
The Impact

Operating leases forma great part of companies financing structures in todays economicenvironment. Some accounting standard-setters and other users of financialstatements are of the opinion that the current standard on accounting foroperating leases, IAS 17, does not provide sufficient guidelines on the disclosureof a companys leasing activities. The current accounting standard on leasesprovides companies with the opportunity to classify lease contracts intodifferent classes which leads to off-balance-sheet financing. This problem iscurrently being addressed by the IASB as they are in the process of developingan improved standard on leases.The main focus ofthis paper is to determine the impact of the improved accounting standard onthe financial statements and the resulting financial ratios of theJSETop40 companies when operating leases are accounted for ason-balance-sheet debt. The differences between the current IAS 17 and theExposure draft (ED/2010/9) are identified and the comparison indicatessignificant differences between these two approaches on accounting foroperating lease activities.The focus of the IASBin developing this exposure draft was to provide the users of financialstatements with a universal picture of the leasing activities that the companyis engaged in. The findings include that this objective is achieved as usersare not left uninformed about any of the financing activities that stakeholdersare exposed to if indeed a company is engaged in operating lease activities.The study also revealed that the capitalising of long-term operating leaseswill have a significant effect on the key financial ratios that stakeholdersuse to interpret a companys financial performance.

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