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Converting financial statements: operating to capitalised leases

Author

Listed:
  • Wei Xu
  • Robyn Alexandra Davidson
  • Chee Seng Cheong

Abstract

Purpose - The purpose of this paper is to examine how capitalising operating leases under IFRS 16/AASB 16 affects the financial statements and value relevance of financial information. In doing so, limitations of exiting methods are highlighted and improved upon. Design/methodology/approach - Imhoffet al.’s (1991) constructive method for capitalising operating leases is improved upon and used to restate the financial statements of 165 S&P/ASX200 companies. The financial position, key ratios and value relevance are tested for significant differences. Findings - The results provide evidence that capitalising operating leases affects financial statements and value relevance. Originality/value - Imhoffet al.’s (1991) constructive method has been refined, providing an improved method for capitalising operating leases than the one that has been used in the past. From a practical perspective, this research provides evidence supporting the “right-of-use” method proposed by the IASB which will see previous off-balance-sheet leases recognised.

Suggested Citation

  • Wei Xu & Robyn Alexandra Davidson & Chee Seng Cheong, 2017. "Converting financial statements: operating to capitalised leases," Pacific Accounting Review, Emerald Group Publishing Limited, vol. 29(1), pages 34-54, February.
    • Handle: RePEc:eme:parpps:par-01-2016-0003
    DOI: 10.1108/PAR-01-2016-0003
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