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The warehouse capital management policy – Treatment of leases

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  • Bradbury, Michael E.

Abstract

This case requires the use of financial statement footnote data to constructively capitalise operating leases. This is important because the joint FASB/IASB project has a proposal to capitalise most leases that are currently off-balance sheet. The impact of lease capitalisation is assessed by calculating common financial statement ratios and comparing the results to a lease multiple. Multiples are a rule-of-thumb method of estimating lease capitalisation. But are they accurate? The economic consequences of lease capitalisation are investigated. First, the impact on the firm's capital management policy is assessed. This includes the impact on accounting ratios that are required to be maintained by the firm's debt contract. Second, the impact touches on a potential ‘sale and leaseback’ business decision.

Suggested Citation

  • Bradbury, Michael E., 2015. "The warehouse capital management policy – Treatment of leases," Journal of Accounting Education, Elsevier, vol. 33(3), pages 228-240.
    • Handle: RePEc:eee:joaced:v:33:y:2015:i:3:p:228-240
    DOI: 10.1016/j.jaccedu.2015.04.004
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    References listed on IDEAS

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    1. El-Gazzar, Samir & Lilien, Steve & Pastena, Victor, 1986. "Accounting for leases by lessees," Journal of Accounting and Economics, Elsevier, vol. 8(3), pages 217-237, October.
    2. Beattie, Vivien & Goodacre, Alan & Thomson, Sarah Jane, 2006. "International lease-accounting reform and economic consequences: The views of U.K. users and preparers," The International Journal of Accounting, Elsevier, vol. 41(1), pages 75-103.
    3. Imhoff, E.A. & Thomas, J.K., 1988. "Economic Consequences Of Accounting Standards: The Lease Disclosure Rule Change," Papers fb-_88-36, Columbia - Graduate School of Business.
    4. Imhoff, Eugene Jr. & Thomas, Jacob K., 1988. "Economic consequences of accounting standards : The lease disclosure rule change," Journal of Accounting and Economics, Elsevier, vol. 10(4), pages 277-310, December.
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    Cited by:

    1. Spiceland, Charlene & Spiceland, David & Njoroge, Phillip Kamau, 2018. "Tourist Trap: The new lease accounting standard and debt covenants," Journal of Accounting Education, Elsevier, vol. 45(C), pages 45-59.
    2. Gray, David L. & Daly, Abbie L., 2019. "Home Technology Innovations, Inc.: Transitioning to the new leasing standard," Journal of Accounting Education, Elsevier, vol. 49(C).

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