The warehouse capital management policy – Treatment of leases

Michael E. Bradbury

Journal of Accounting Education, 2015, vol. 33, issue 3, 228-240

Abstract: This case requires the use of financial statement footnote data to constructively capitalise operating leases. This is important because the joint FASB/IASB project has a proposal to capitalise most leases that are currently off-balance sheet. The impact of lease capitalisation is assessed by calculating common financial statement ratios and comparing the results to a lease multiple. Multiples are a rule-of-thumb method of estimating lease capitalisation. But are they accurate? The economic consequences of lease capitalisation are investigated. First, the impact on the firm's capital management policy is assessed. This includes the impact on accounting ratios that are required to be maintained by the firm's debt contract. Second, the impact touches on a potential ‘sale and leaseback’ business decision.

Keywords: Lease accounting; Constructive lease capitalisation; International Financial Reporting Standards; Debt agreements; Financial ratios; Accounting case study; Teaching resources (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:joaced:v:33:y:2015:i:3:p:228-240

DOI: 10.1016/j.jaccedu.2015.04.004

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