Converting financial statements: operating to capitalised leases

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

Imhoff et 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

Imhoff et 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.

Citation

Xu, W., Davidson, R.A. and Cheong, C.S. (2017), "Converting financial statements: operating to capitalised leases", Pacific Accounting Review, Vol. 29 No. 1, pp. 34-54. https://doi.org/10.1108/PAR-01-2016-0003