Exam 17: Leases

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From the viewpoint of a company preparing financial statements, there are at least two types of economic consequences of lease accounting. One is the cost of complying with lease capitalization. More detailed analyses will be required by a company and its auditor in classifying leases as operating and capital. Finite uniformity always imposes a higher compliance cost than rigid uniformity.The more critical concern has been whether lease capitalization might provide disincentives for leasing itself. From a lessee's perspective, leasing offered the possibility of off-balance-sheet financing for most leases prior to SFAS No. 13. A survey of lessees indicated that the effect on financial statements was a major reason for leasing. Noncapitalization of leases improves debt ratios and accounting rate of return compared with a purchase/debt alternative. Some lessees also believed that noncapitalization of leases increased available capital because these leases do not affect borrowing restrictions in debt covenants and that the lower debt ratios that would be achieved by noncapitalization would result in better debt ratings and lower interest rates in the capital market. A study of pre-SFAS No. 13 lease accounting found that companies with high leverage levels were more likely to have reported their leases as operating rather than capital leases.