PROPOSED ACCOUNTING STANDARD REQUIRES CAPITALIZATION OF ALL LONG-TERM LEASES FOR LESSEES

Authors

Mark G. McCarthy, East Carolina University
Brett Cotton, Columbus State University
Douglas K. Schneider, East Carolina University

Abstract

Accounting for leases has been a controversial issue both internationally and in the United States for a number of years. The focus of the issue has been whether or not simply disclosing the amount of lease commitments by the lessee in the notes to the financial statements is adequate financial reporting for long-term leases classified as operating leases. In 2010 the Financial Accounting Standards Board and International Accounting Standards Board jointly issued an exposure draft, Leases (Topic 840), requiring lessees to report an asset and liability for the present value of the committed lease payments or contracts that extend for more than one year. In July 2011, the two boards agreed to re-expose their proposal for this leases standard. A revised proposal was issued in May 2013. This paper examines changes in several balance sheet and income statement ratios by industry and specifically for a grocery store, a merchandiser, and an airline, that will result from the new accounting standard. As expected, ratios involving liabilities change in a direction making the companies appear more risky. In addition, the income statements are revised by imputing interest on the assumed capitalized amount of noncancellable leases and the interest coverage ratios are recalculated. Two companies reporting profits show a decline in the ratio while the airline actually experiences the ratio changing from negative to positive.

Recommended Citation

McCarthy, Mark G.; Cotton, Brett; and Schneider, Douglas K. (2014) "PROPOSED ACCOUNTING STANDARD REQUIRES CAPITALIZATION OF ALL LONG-TERM LEASES FOR LESSEES," The Coastal Business Journal: Vol. 13: No. 1, Article 1.
Available at: https://digitalcommons.coastal.edu/cbj/vol13/iss1/1