Constructive Capitalization of Operating Leases in the Hong Kong Fast-Food Industry

The current study is undertaken to investigate the potential problems resulting from the proposed adoption of a new accounting standard concerning mandatory capitalization of all lease contracts. In 2010, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) issued a joint exposure draft (ED2010/9) on accounting for leases. Under the new standard, lessees are required to capitalize all lease contracts as assets and liabilities. The distinction between operating leases and capital (finance) leases will no longer exist. The long-standing off-balance sheet treatment of operating leases will be prohibited. After the adoption of the proposed standard, companies with significant operating leases are likely to experience an increase in assets, increase in liabilities, and decrease in equity, resulting in the deterioration of their return-on- assets and debt-to-equity ratios. This research examines two large fast-food restaurant chains based in Hong Kong; and through constructive capitalization, demonstrates how the companies’ key financial ratios are negatively impacted if the new standard is implemented. The results indicate that both the return-on-assets and debt-to-equity ratios of the two companies, under various discount rates assumptions, suffer serious deterioration when their operating leases are capitalized.

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

Accounting Horizons ◽

10.2308/acch-50048 ◽

2011 ◽

Vol 25 (4) ◽

pp. 861-871 ◽

Cited By ~ 23

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.

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

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v9i9.5633 ◽

2011 ◽

Vol 9 (9) ◽

pp. 29 ◽

Cited By ~ 1

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

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&P 100 under a variety of discount rates.

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Financial Reporting Impact Of The Operating Lease Classification

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v28i6.7405 ◽

2012 ◽

Vol 28 (6) ◽

pp. 1509 ◽

Cited By ~ 1

Author(s):

John Kostolansky ◽

Dora Altschuler ◽

Brian B. Stanko

Keyword(s):

North America ◽

Financial Reporting ◽

Balance Sheet ◽

Accounting Standards ◽

Financial Statements ◽

Financial Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Operating Leases ◽

The Impact

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are preparing to make changes to accounting standards for leasing that will have a significant impact on the financial statements of a large number of companies. The proposed standard will eliminate the operating lease classification, and if passed, companies using this classification will be required to report additional assets and liabilities on the balance sheet. This study estimates the impact of this change in accounting standards on the financial statements and several key financial ratios for an extensive sample of companies and industries from the Compustat North America database. It is important that users of financial statements understand and are prepared for these changes prior to implementation, particularly for industries in which operating leases are heavily utilized.

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Distortions in the measurement of the efficiency of financial leverage strategies in the airline industry when operating leases are ignored

Journal of Transportation Management ◽

10.22237/jotm/1396310580 ◽

2014 ◽

Vol 25 (1) ◽

pp. 21-36

Author(s):

Carl A Sheraga ◽

Paul Caster

Keyword(s):

Airline Industry ◽

Balance Sheet ◽

Accounting Standards ◽

Financial Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Financial Leverage ◽

Balance Sheets ◽

Operating Leases ◽

Management Perspective

The Financial Accounting Standards Board and the International Accounting Standards Board have set forth a proposal requiring companies to capitalize operating leases and include them as assets and liabilities on their balance sheets. The proposal is motivated by the fact that current methods accounting for operating leases hide a great deal of off-book leverage and thus are misleading to investors. Such a change would have a significant impact on the U.S. airline industry where aircraft and property operating leases are quite prevalent. This study utilizes an in-depth strategic management perspective in examining how well U.S. airlines pursue optimization strategies with regard to the management of financial leverage in order to achieve desired targets of growth and profitability. Such benchmarking is accomplished by utilizing the DEA model suggested by Capobianco and Fernandes (2004). This study demonstrates the distortion inherent in inter-airline benchmarking when operating leases are not capitalized on the balance sheet.

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Goodwill Impairment: A New Window For Earnings Management?

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v8i2.669 ◽

2010 ◽

Vol 8 (2) ◽

Cited By ~ 1

Author(s):

Yousef Jahmani ◽

William A. Dowling ◽

Paul D. Torres

Keyword(s):

Earnings Management ◽

Balance Sheet ◽

Accounting Information ◽

Accounting Standards ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Font Size ◽

Rates Of Return ◽

Public Companies ◽

Goodwill Impairment

The Financial Accounting Standards Board promulgated standard No. 142 in an attempt to improve the understandability of accounting information.  This new rule eliminated the practice of automatically amortizing goodwill.  No. 142 requires public companies to test goodwill for possible impairment at least annually.  An unintended consequence of this new standard is the opportunity for companies to use it in earnings management.  To test the possibility that the rule is being used for this purpose, a sample of companies was chosen, all of which had amounts of goodwill on their balance sheet during the 2003-2005 interval.  The results reveal that the number of companies experiencing losses or low rates of return on total assets who actually impaired goodwill was statistically insignificant during the period under consideration.  Thus, the results strongly suggest that companies are using No. 142 in an attempt to manage the volatility of earnings.

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Stock Option Expense: The Sword of Damocles Revealed

Accounting Horizons ◽

10.2308/acch.2001.15.4.311 ◽

2001 ◽

Vol 15 (4) ◽

pp. 311-327 ◽

Cited By ~ 45

Author(s):

Christine A. Botosan ◽

Marlene A. Plumlee

Keyword(s):

Accounting Standards ◽

Fair Value ◽

Stock Option ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Return On Assets ◽

Earnings Per Share ◽

Disclosure Requirements ◽

Differences Of Opinion ◽

Fortune Magazine

Statement of Financial Accounting Standards (SFAS) No. 123 is one of the most controversial accounting standards ever issued by the Financial Accounting Standards Board (FASB 1995) (SFAS No. 123, para. 376). More than five years have passed since SFAS No. 123 first required firms to either recognize or disclose stock option expense based on the fair value of options granted. In light of the fractious debate surrounding its passage and ongoing differences of opinion regarding the usefulness of stock option expense data, this paper reports how the standard impacts firm performance. This study examines the effect of stock option expense on the diluted earnings per share and return on assets of 100 firms identified by Fortune magazine as “America's Fastest-Growing Companies.” We find that stock option expense has a material impact on the performance measures for a majority of our sample firms. Moreover, our analysis predicts stock option expense will grow over the next several years, potentially doubling in magnitude during that time. We also document some noncompliance with the disclosure requirements of SFAS No. 123, finding that 12 percent of the sample firms provided incomplete information during the most recent year examined.

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¿Ingresos integrales, teoría de la entidad o concepto de entidad? Un compromiso diplomático en la redacción de informes financieros

De Computis - Revista Española de Historia de la Contabilidad ◽

10.26784/issn.1886-1881.v13i25.261 ◽

2017 ◽

Vol 13 (25) ◽

pp. 8

Author(s):

Marco Angelo Marinoni ◽

Andrea Cilloni

Keyword(s):

Balance Sheet ◽

Accounting Standards ◽

Financial Statements ◽

Financial Accounting ◽

International Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Accounting Systems ◽

Generally Accepted Accounting Principles ◽

Income Statement

The globalizations of markets and increased international cooperation in the harmonized accounting systems have highlighted the difficulties inherent in the development of generally accepted accounting principles. The Financial Accounting Standards Board, FASB, and the International Accounting Standards Board, IASB, are therefore working - through shared projects – in conducting a “Conceptual Framework Project”, which will lead to increased knowledge and understanding of the principles of international accounting convergence.The process of international harmonization has defined the concept of “Comprehensive Income”, i.e. a new structure of the Income Statement, in which they reside clearly even charges and unrealized gains (as final assets adjustments, monetary exchange variations and so on). The Balance Sheet and the Financial Statements in general, continue to maintain an approach prone to theory of property valuation, given the shareholder, as the main carrier of social interest.

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Standard-Setting Issues and Academic Research Related to the Accounting for Financial Asset Transfers

Accounting Horizons ◽

10.2308/acch.2007.21.1.59 ◽

2007 ◽

Vol 21 (1) ◽

pp. 59-80 ◽

Cited By ~ 26

Author(s):

Katherine Schipper ◽

Teri Lombardi Yohn

Keyword(s):

Cross Section ◽

Financial Reporting ◽

Academic Research ◽

Balance Sheet ◽

Accounting Standards ◽

Financial Accounting ◽

Future Research ◽

Financial Asset ◽

International Accounting Standards ◽

Financial Accounting Standards Board

A large number and cross-section of firms undertake financial asset transfers. The Financial Accounting Standards Board and the International Accounting Standards Board have been grappling with the appropriate accounting for financial asset transfers, especially with respect to derecognition—that is, when the assets should be removed from the transferor's balance sheet. This paper discusses the financial reporting issues surrounding financial asset transfers and summarizes the related academic research. It also discusses potentially useful future research that could provide insights for standard-setters and suggests some impediments to that research.

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Issues in Lessor Accounting: The Forgotten Half of Lease Accounting

Accounting Horizons ◽

10.2308/acch-10021 ◽

2011 ◽

Vol 25 (2) ◽

pp. 247-266 ◽

Cited By ~ 3

Author(s):

Mark P Bauman ◽

Richard N Francis

Keyword(s):

Balance Sheet ◽

Accounting Standards ◽

Decision Makers ◽

Financial Accounting ◽

Financial Statement ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Disclosure Quality ◽

Residual Values ◽

Lease Accounting

SYNOPSIS In July 2006, the International Accounting Standards Board and the Financial Accounting Standards Board (the “Boards”) added a leasing project to their agenda. In August 2010, the Boards jointly released an exposure draft proposing a “right-of-use” model for the recognition of lease-related assets and liabilities. In their deliberations, the Boards noted numerous studies focusing on lessee accounting, but very little research examining lessor-related topics. To address this gap in the literature, this paper identifies key reporting and disclosure issues associated with lessors, and suggests improvements that could be incorporated into lease accounting guidance. This study is based on an analysis of the financial statement disclosures of 57 of the 100 largest equipment lessors in the U.S. market. Disclosure quality, residual values, and the balance sheet impact of the proposal are examined, and numerous suggestions are offered to enhance the usefulness of lessor financial statement disclosures for decision makers.

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Amortized Cost for Operating Lease Assets

Accounting Horizons ◽

10.2308/acch-50278 ◽

2012 ◽

Vol 27 (1) ◽

pp. 51-74 ◽

Cited By ~ 8

Author(s):

Ross Jennings ◽

Ana Marques

Keyword(s):

Accounting Standards ◽

Cash Flows ◽

Data Availability ◽

Financial Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Present Value ◽

Financial Ratio ◽

Straight Line ◽

Operating Leases

SYNOPSIS: A proposed accounting standard issued jointly by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) would require firms to recognize many more lease assets than are 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. Data Availability: Data used in this paper are publicly available.

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