Operating-Lease Disclosures: an empirical investigation

In 2008, the International Accounting Standards Board (IASB), in cooperation with the Financial Accounting Standards Board (FASB), will issue a new proposal to change the current accounting regulation with respect to leasing to an alternative approach. This new lease-accounting approach, called the “asset and liability approach”, capitalises all leases on the balance sheet. This contrasts with the current lease-accounting approach, called the “risk and reward approach”, which discriminates between the recognition of financial leases on the balance sheet and the disclosure of operating leases off the balance sheet. As with the current risk and reward approach, also the asset and liability approach has many opponents. This study investigates: - what the impact on financial ratios might be when operating leases are capitalised on the balance sheet, - what company characteristics determines the choice for operating leases, and - whether financially-distressed companies use more operating leases than healthy companies. The results show that operating leases have become a major financing source, which is not only attributable to the accounting treatment of operating leases. However, the information on operating leases as required in the footnotes to the financial statements is not transparent, nor reliable. The current lease-accounting standards might be maintained but improved, and this could be an intermediate solution that is acceptable for the proponents of both lease-accounting approaches.

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