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Tourist Trap: The new lease accounting standard and debt covenants

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  • Spiceland, Charlene
  • Spiceland, David
  • Njoroge, Phillip Kamau

Abstract

This instructional case centers on an ambitious retail store in the midst of expansion and employs the setting of debt covenants to lead students through an analysis of the effects on financial statements of the new lease accounting standard (ASC 842). The case is designed to have the new lease standard force the company into violation of some of these covenants. The intent is to enable you (a) to bolster and reinforce your understanding of the new lease guidance, (b) to compare the old and new lease standards, (c) to appreciate the role of debt covenants in financing agreements, (d) to calculate covenant ratios, and (e) to evaluate whether the retail operation can remain in compliance with its debt covenants during and after the transition to the new lease standard. The case dynamics span the length of the lease, so you must think critically about the short- and long-run effects of the new standard on the firm and its financial reporting. The case is designed for undergraduate intermediate accounting or finance students or students in M.B.A. or M.S. in accounting programs. The key learning objectives for you in the case are to develop an understanding of the new lease standard in relevant context and to improve and enhance the ability to calculate multi-year flow-through effects of transactions. The professional competencies the case enhances are the ability to think critically regarding effects of divergent accounting treatments on business decisions and augmented writing and communication skills.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:joaced:v:45:y:2018:i:c:p:45-59
    DOI: 10.1016/j.jaccedu.2018.08.001
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    References listed on IDEAS

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    1. Bradbury, Michael E., 2015. "The warehouse capital management policy – Treatment of leases," Journal of Accounting Education, Elsevier, vol. 33(3), pages 228-240.
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    1. 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).
    2. Everaert, Patricia & Safari, Maryam, 2021. "Digital self-contained module to assist a writing task on evaluating the financial, social, and environmental performance of a company: Teaching note," Journal of Accounting Education, Elsevier, vol. 57(C).

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