Skip to main content
SpringerLink
Log in

Impact of Lease Capitalization on Financial Ratios of Listed German Companies

  • Lease Capitalization
  • Published:
Schmalenbach Business Review Aims and scope

Abstract

The separation of leases into operating and finance leases for accounting purposes can result in incentives to favor operating lease contracts, since they avoid on-balance-sheet debt. the IASB and FASB are conducting a long-term joint project on leasing, following the G4+1 group’s research on possible improvements to lease accounting. one alternative is to treat all leases in a manner similar to today’s finance leasing. Our simulation results for Germany show notable changes in a variety of financial ratios, especially for assets and liability relations, which may trigger management with incentives to dampen these effects. Of note for standard setters, the effects of operating lease capitalization should not be overstated. Only minor effects can be observed for profitability ratios and market multiples often used for valuation purposes. Moreover, most industries remain almost unaffected and the relative ratio-based ranking of all sample companies does not change much. Additionally, we observe that the common Creditstats® model yields somewhat comparable results.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Abdel-khalik, A. Rashad (1981), The economic effects on lessees of FASB Statement No. 13 Accounting for Leases, Stamford, CT: FASB.

    Google Scholar 

  • Altman, Edward I., Robert G. Haldeman, and Paul Narayanan (1977), ZetaTM analysis, Journal of Banking and Finance 1, 29–54.

    Article  Google Scholar 

  • Barker, Richard G. (1999), The role of dividends in valuation models used by analysts and fund managers, European Accounting Review 8, 195–218.

    Article  Google Scholar 

  • Barnes, Paul (1987), The analysis and use of financial ratios: A review article, Journal of Business, Finance and Accounting 14, 449–461.

    Article  Google Scholar 

  • BDL, Bundesverband Deutscher Leasing-Unternehmen e.V. (2006), The leasing market 2005, Berlin: BDL.

    Google Scholar 

  • Beattie, Vivien, Keith Edwards, and Alan Goodacre (1998), The impact of constructive operating lease capitalization on key accounting ratios, Accounting and Business Research 28, 233–254.

    Article  Google Scholar 

  • Beattie, Vivien, Alan Goodacre, and Sarah J. Thomson (2000a), Operating leases and the assessment of lease-debt substitutability, Journal of Banking and Finance 24, 427–470.

    Article  Google Scholar 

  • Beattie, Vivien, Alan Goodacre, and Sarah J. Thomson (2000b), Recognition versus disclosure: An investigation of the impact on equity risk using UK operating lease disclosure, Journal of Business, Finance and Accounting 27, 1185–1224.

    Article  Google Scholar 

  • Beattie, Vivien, Alan Goodacre, and Sarah J. Thomson (2006), International lease-accounting reform and economic consequences: The views of UK users and preparers, International Journal of Accounting 41, 75–103.

    Article  Google Scholar 

  • Beaver, William H. (1998), Financial reporting: An accounting revolution, 3rd ed., Upper Saddle River, NJ: Prentice-Hall.

    Google Scholar 

  • Begley, Joy (1990), Debt covenants and accounting choice, Journal of Accounting and Economics 12, 125–139.

    Article  Google Scholar 

  • Bennett, Bruce K. and Michael E. Bradbury (2003), Capitalizing non-cancelable operating leases, Journal of International Financial Management and Accounting 14, 101–114.

    Article  Google Scholar 

  • Booth, Geoffry G., John Broussard, and Otto Loistl (1997), Earnings and stock returns: evidence from Germany, European Accounting Review 6, 489–603.

    Google Scholar 

  • Bowman, Robert G. (1980), The debt equivalence of leases: An empirical investigation, Accounting Review 55, 237–253.

    Google Scholar 

  • Breton, Gaétan and Richard J. Taffler (1995), Creative accounting and investment analyst response, Accounting and Business Research 25, 81–92.

    Article  Google Scholar 

  • Callihan, Debra S. (1994), Corporate effective tax rates: A synthesis of the literature, Journal of Accounting Literature 13, 1–43.

    Google Scholar 

  • Catanach Jr., Anthony H. and Robert S. Kemp Jr. (1999), The information needs of bank lending officers, Commercial Lending Review 14, 76–78.

    Google Scholar 

  • Comiskey, Eugene E. and Charles W. Mulford (1998), Analysing small-company financial statements: Some guidance for lenders, Commercial Lending Review 13, 30–42.

    Google Scholar 

  • Durocher, Sylvain (2005), The capitalization of operating leases: A Canadian study, Unpublished EAA Paper (28th EAA annual congress in Gothenburg, Sweden).

    Google Scholar 

  • Elam, Rick (1975), The effect of lease data on the predictive ability of financial ratios, Accounting Review 50, 25–42.

    Google Scholar 

  • El-Gazzar, Samir M. (1993), Stock market effects of the closeness to debt covenant restrictions resulting from capitalization of leases, Accounting Review 68, 258–272.

    Google Scholar 

  • Ely, Kirsten M. (1995), Operating lease accounting and the market’s assessment of equity risk, Journal of Accounting Research 33, 397–415.

    Article  Google Scholar 

  • Finnerty, Joseph E., Rick N. Fitzsimmons, and Thomas W. Oliver (1980), Lease capitalization and systematic risk, Accounting Review 55, 631–639.

    Google Scholar 

  • Fülbier, Rolf U. and M. Henrik Pferdehirt (2005), Überlegungen des IASB zur künftigen Leasingbilanzierung: Abschied vom off-balance sheet approach, Zeitschrift für internationale und kapitalmarktorientierte Rechnungslegung 5, 275–284.

    Google Scholar 

  • Gallery, Gerry and Eugene A. Imhoff Jr. (1998), Disclosure versus recognition: Some evidence from the Australian capital market regarding off-balance sheet leasing, Paper presented at the University of Melbourne, Research Seminar Series.

    Google Scholar 

  • Garrod, Neil (1989), Regulation and response: The case of lease disclosure in the UK, Research in Accounting Regulation 3, 69–92.

    Google Scholar 

  • Gassen, Joachim, Rolf U. Fülbier, and Thorsten Sellhorn (2006), International differences in conditional conservatism: The role of unconditional conservatism and income smoothing, European Accounting Review 15, 527–564.

    Article  Google Scholar 

  • Giersberg, Jens and Marcus Vögtle (2007), Bilanzielle Auswirkungen der Adjustierung von Operating-Leasingver-hältnissen, Finanz Betrieb 9, 431–442.

    Google Scholar 

  • Godfrey, Jayne M. and Susan M. Warren (1995), Lessee reactions to regulation of accounting for leases, ABACUS 31, 201–228.

    Article  Google Scholar 

  • Goodacre, Alan (2003a), Assessing the potential impact of lease accounting reform: A review of the empirical evidence, Journal of Property Research 20, 49–66.

    Article  Google Scholar 

  • Goodacre, Alan (2003b), Operating lease finance in the UK retail sector, International Review of Retail, Distribution and Consumer Research 13, 99–125.

    Article  Google Scholar 

  • Gosman, Martin L. and Ernest I. Hanson (2000), The impact of leasing on lenders’ evaluations of firms’ debt levels, Commercial Lending Review 15, 53–60.

    Google Scholar 

  • Gritta, Richard D. (1974), The impact of the capitalization of leases on financial analysis: A case study in air transport, Financial Analysts Journal 30, 47–52.

    Article  Google Scholar 

  • Gritta, Richard D., Edward Lippman, and Garland Chow (1994), The impact of the capitalization of leases on airline financial analysis: An issue revisited, Logistics and Transportation Review 30, 189–202.

    Google Scholar 

  • Hartman, Barth S. and Heibatollah Sami (1989), The impact of accounting treatment of leasing contracts on user decision making: A field experiment, Advances in Accounting 7, 23–35.

    Google Scholar 

  • Healy, Paul M. (1985), The effect of bonus schemes on accounting decisions, Journal of Accounting and Economics 7, 85–107.

    Article  Google Scholar 

  • Helmschrott, Harald (2000), Leasingbilanzierung im Umbruch, Aachen: Shaker.

    Google Scholar 

  • Hennessy, John L. (1961), Recording of lease obligations and related property rights, Journal of Accountancy 39, 40–46.

    Google Scholar 

  • Houlihan, William A. and Ashwinpaul C. Sondhi (1984), De facto capitalization of operating leases: The effect on debt capacity, Corporate Accounting 2, 3–13.

    Google Scholar 

  • Imhoff Jr., Eugene A., Robert C. Lipe, and David W. Wright (1991), Operating leases: Impact of constructive capitalization, Accounting Horizons 5, 51–63.

    Google Scholar 

  • Imhoff Jr., Eugene A., Robert C. Lipe, and David W. Wright (1993), The effects of recognition versus disclosure on shareholder risk and executive compensation, Journal of Accounting, Auditing and Finance 8, 51–63.

    Article  Google Scholar 

  • Imhoff Jr., Eugene A., Robert C. Lipe, and David W. Wright (1997), Operating leases: Income effects of constructive capitalization, Accounting Horizons 11, 12–32.

    Google Scholar 

  • Imhoff Jr., Eugene A. and Jacob K. Thomas (1988), Economic consequences of accounting standards: The lease disclosure rule change, Journal of Accounting and Economics 10, 277–310.

    Article  Google Scholar 

  • Joos, Peter and Mark Lang (1994), The effects of accounting diversity: Evidence from the European Union, Journal of Accounting Research 32 (Suppl.), 141–168.

    Article  Google Scholar 

  • Kemp Jr., Robert P. and George A. Overstreet Jr. (1990), A study of the information needs of commercial loan officers, Journal of Commercial Bank Lending 72, 47–57.

    Google Scholar 

  • Kilpatrick, Bob G. and Nancy L. Wilburn (2007), Off-balance-sheet financing & operating leases impact on lessee financial ratios, RMA Journal 89, 80–87.

    Google Scholar 

  • Knutson, Peter H. (1993), Financial reporting in the 1990s and beyond, Charlottesville, VA: Association for Investment Management Research.

    Google Scholar 

  • Lanfranconi, Claude P. and Christine Wiedmann (2000), If one goes, will the other follow? Operating leases and off-balance sheet accounting, Ivey Business Journal 64, 61–65.

    Google Scholar 

  • Leibfried, Peter and Carmen Rogowski (2005), Mögliche zukünftige Leasingbilanzierung nach IFRS, Zeitschrift für internationale und kapitalmarktorientierte Rechnungslegung 5, 552–555.

    Google Scholar 

  • Lev, Baruch and Shyam Sunder (1979), Methodological issues in the use of financial ratios, Journal of Accounting and Economics 1, 187–210.

    Article  Google Scholar 

  • Lipe, Robert C. (2001), Lease accounting research and the G4+1 proposal, Accounting Horizons 15, 299–310.

    Article  Google Scholar 

  • Lückerath-Rovers, Mijntje and Auke de Bos (2005), The decision usefulness of operating lease disclosure: An empirical investigation among Dutch listed companies, Unpublished EAA Paper (28th EAA annual congress in Gothenburg, Sweden).

    Google Scholar 

  • McGregor, Warren (1996), Accounting for leases: A new approach, Norwalk, CT: FASB.

    Google Scholar 

  • Moody’s (1999), Off-balance sheet leases: Capitalization and ratings implications — Out of sight but not out of mind, New York, NY: Moody’s Investor Service.

    Google Scholar 

  • Munter, Paul and Thomas A. Ratcliffe (1983), An assessment of user reactions to lease accounting disclosure, Journal of Accounting, Auditing and Finance 6, 108–114.

    Google Scholar 

  • Nailor, Hans and Andrew Lennard (2000), Leases: Implementation of a new approach, Norwalk, CT: FASB.

    Google Scholar 

  • Nelson, A. Tom (1963), Capitalizing leases: The effect on financial ratios, Journal of Accountancy 41, 49–58.

    Google Scholar 

  • Pferdehirt, Henrik (2007), Die Leasingbilanzierung nach IFRS, Wiesbaden: Gabler.

    Google Scholar 

  • Prakash, Prem and Alfred Rappaport (1977), Information inductance and its significance for accounting, Accounting, Organization and Society 2, 29–38.

    Article  Google Scholar 

  • Rapach, David E. and Mark E. Wohar (2005), Valuation ratios and long-horizon stock price predictability, Journal of Applied Econometrics 20, 327–344.

    Article  Google Scholar 

  • Ryan, Stephen G. et al. (2001), Commentary: Evaluation of the lease accounting proposed in G4+1 special report, Accounting Horizons 15, 289–298.

    Article  Google Scholar 

  • Sannella, Alexander (1989), The capitalization of operating leases: The discounted cashflow approach, Journal of Commercial Bank Lending 72, 49–55.

    Google Scholar 

  • Schipper, Katherine (1994), Academic accounting research and the standard setting process, Accounting Horizons 8, 61–73.

    Google Scholar 

  • Standard & Poor’s (2002), Credit Stats operating lease analytical model, New York: Standard & Poor’s.

    Google Scholar 

  • Standard & Poor’s (2005), Corporate ratings criteria, New York: Standard & Poor’s.

    Google Scholar 

  • Stanga, Keith G. and Mikel G. Tiller (1983), Needs of loan officers for accounting information from large versus small companies, Accounting and Business Research 14, 63–70.

    Article  Google Scholar 

  • Taylor, Peter and Stuart Turley (1985), The views of management on accounting for leases, Accounting and Business Research 16, 59–67.

    Article  Google Scholar 

  • Watts, Ross L. and Jerold L. Zimmerman (1986), Positive accounting theory, Englewood Cliffs, NJ: Prentice Hall.

    Google Scholar 

  • Wilkins, Trevor A. (1984), A behavioural investigation of alternative methods of financing capital acquisitions and lease capitalization, Accounting and Business Research 14, 359–366.

    Article  Google Scholar 

  • Wilkins, Trevor A. and Ian Zimmer (1983a), The effects of alternative methods of accounting for leases: An experimental study, ABACUS 19, 64–75.

    Article  Google Scholar 

  • Wilkins, Trevor A. and Ian Zimmer (1983b), The effect of leasing and different methods of accounting for leases on credit evaluations, Accounting Review 58, 749–764.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. WHU - Otto Beisheim School of Management, Chair of Accounting, Burgplatz 2, 56179, Vallendar, Germany

    Rolf Uwe Fülbier

  2. Bain & Company Iberica, Inc., Paseo de la Castellana, 216 9th floor, 28046, Madrid, Spain

    Jorge Lirio Silva

  3. Ernst & Young AG, Assurance & Advisory Business Services (AABS), Graf-Adolf-Platz 15, 40213, Düsseldorf, Germany

    Marc Henrik Pferdehirt

Authors
  1. Rolf Uwe Fülbier
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jorge Lirio Silva
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Marc Henrik Pferdehirt
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Rolf Uwe Fülbier.

Additional information

We thank two anonymous referees, Thorsten Sellhorn, Georg Stadtmann, and participants at the 29th Eaa annual congress in Dublin, Ireland, for providing helpful comments.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Fülbier, R.U., Silva, J.L. & Pferdehirt, M.H. Impact of Lease Capitalization on Financial Ratios of Listed German Companies. Schmalenbach Bus Rev 60, 122–144 (2008). https://doi.org/10.1007/BF03396762

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF03396762

JEL-Classification

Keywords

Search

Navigation