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Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS
Author(s) -
Duke Joanne C.,
Franz David,
Hsieh SuJane
Publication year - 2012
Publication title -
accounting perspectives
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.238
H-Index - 17
eISSN - 1911-3838
pISSN - 1911-382X
DOI - 10.1111/j.1911-3838.2012.00031.x
Subject(s) - capitalization , finance , business , lease , balance sheet , debt , operating budget , equity (law) , portfolio , accounting , economics , philosophy , linguistics , political science , law
This case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS , we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.