Variable leases under ASC 842: first evidence on properties and consequences

Jonas Heese (), Albert Shin () and Charles C. Y. Wang ()
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Jonas Heese: Harvard Business School
Albert Shin: Harvard Business School
Charles C. Y. Wang: Harvard Business School

Review of Accounting Studies, 2025, vol. 30, issue 3, No 2, 2218-2263

Abstract: Abstract The new lease standard (ASC 842) allows firms to keep variable leases off balance sheet, in part based on the assumption that future expenses are difficult to estimate reliably. We show that variable lease expenses are both prevalent and substantial, exhibiting persistence and predictability comparable to operating lease expenses while showing limited sensitivity to revenue changes. These patterns are consistent with variable lease payments being based on stable drivers. Following ASC 842 adoption, firms report lower minimum operating lease commitments and higher variable lease expenses, suggesting a substitution from operating to variable leases. Neither equity betas nor credit ratings reflect potential variable lease liabilities. Conservative estimates show that recognition of variable lease liabilities would increase debt by 7.1% on average. Our findings provide evidence on the properties of variable leases and the potential implications of keeping them off balance sheet.

Keywords: ASC 842; Lease Accounting; Reclassification; Variable Leases; Off-balance-sheet liabilities (search for similar items in EconPapers)
JEL-codes: M40 M41 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11142-025-09899-z

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