Leases: A Review of Contemporary Academic Literature Relating to Lessees

Abstract

SYNOPSIS Accounting for corporate leasing activities has been examined and debated for more than 30 years. Currently both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are developing standards to modify financial reporting for operating leases, which are currently reported off-balance sheet. In light of these proposals, we examine existing literature to better anticipate possible effects of any changes. Namely, we review existing studies to understand why firms engage in operating leases and how information about these arrangements impacts users. First, we review studies directly examining leases. As that review reports, some studies show that companies engage in off-balance sheet leasing at least in part to manage financial statement presentation. Other studies, however, suggest that firms utilize operating leases to manage costs and preserve capital. In general, the research reports that lenders, credit rating agencies, and other capital market participants sufficiently understand off-balance sheet leases and consider them in their decision making. Second, we provide commentary on one of the current proposals' more debated areas and a current point of FASB and IASB divergence: classification of expenses associated with operating leases. While the IASB proposes disaggregating interest and amortization elements, the FASB proposes reporting a single, combined lease expense. However, very little research explicitly addresses expenses associated with operating leases. Existing studies do, however, suggest that information disaggregation, particularly with regard to operating and financing activities, is important. Our review may be useful to regulators as the reporting standards for operating leases are debated.

Lease Accounting: Back into the Past—A General Review of Different Theoretical Approaches

“…The selection of literature for analysis was based on the methodology used by Spencer and Webb (2015) who, in their Review of Contemporary Academic Literature, made use of academic databases from which they extracted, through specific criteria research, the studies subsequently examined (Note 1).…”

“…The spread of the phenomenon together with its quantitative relevance explain the liveliness of the debate acknowledged both in the application and regulatory context and in academic one -a debate so lively as to stimulate various reviews that, cyclically, have tried to systematise the different opinions of the doctrine on specific aspects of the subject analysed in this paper (Lipe, 2001;Morais, 2011;Barone et al, 2014;Spencer & Webb, 2015).…”

“…In an ideal extension of the activity carried out by Lipe (2001), Spencer and Webb (2015) have examined numerous scientific products for the explicit purpose of categorising the different doctrinal opinions about: (i) the motivations that drive a company to undertake a leasing transaction, with particular regard to those of operating nature; and (ii) the methods of using information relating to operating leases by the different users of financial statement.…”

Recognition versus disclosure of finance leases: Evidence from Japan

“…Most prior research on recognition versus disclosure investigates whether equity investors treat disclosed financial information differently from recognized amounts (e.g., Aboody, 1996;Ahmed et al, 2006;Davis-Friday et al, 1999;Israeli, 2015;Michels, 2017;Müller et al, 2015;Yu, 2013). This trend of focusing on equity investors has continued when researchers have explored the effects of recognition versus disclosure of lease arrangements (Barone, Birt, & Moya, 2014;Spencer & Webb, 2015). However, the results have been mixed.…”

“…Furthermore, prior research reports that credit market participants-bond investors and credit rating agenciesmake different assessments of the association between off-balance sheet items and firms' credit risk (Barth et al, 2012). A few previous studies investigate whether credit market participants treat disclosed operating leases differently from recognized finance leases (Barone et al, 2014;Spencer & Webb, 2015). For instance, Bratten et al (2013) find that the associations between recognized finance leases versus disclosed operating leases and bond spreads are not substantially different.…”