Discuss two types of economic consequences of lease accounting.

Question

What will be an ideal response?

Answer 1

ANSWER:
From the viewpoint of a company preparing finan-cial statements, there are at least two types of eco-nomic consequences of lease accounting. One is the cost of complying with lease capitalization. More detailed analyses will be required by a com-pany and its auditor in classifying leases as operat-ing and capital. Finite uniformity always imposes a higher compliance cost than rigid uniformity. The more critical concern has been whether lease capi-talization might provide disincentives for leasing itself. From a lessee’s perspective, leasing offered the possibility of off-balance-sheet financing for most leases prior to SFAS No. 13. A survey of les-sees indicated that the effect on financial state-ments was a major reason for leasing. Non-capitalization of leases improves debt ratios and accounting rate of return compared with a pur-chase/debt alternative. Some lessees also believed that non-capitalization of leases increased available capital because these leases do not affect borrowing restrictions in debt covenants and that the lower debt ratios that would be achieved by non-capitalization would result in better debt ratings and lower interest rates in the capital market. A study of pre-SFAS No. 13 lease accounting found that companies with high leverage levels were more likely to have reported their leases as operat-ing rather than capital leases.