Off-balance-sheet financing & operating leases: impact on lessee financial ratios

RMA Journal, The, Dec, 2006 by Bob G. Kilpatrick, Nancy L. Wilburn

Finally, stockholders' equity would decrease for the remaining 60% (100%-40% tax rate) of the difference between the lease obligation and leased asset. This also would result from the cumulative difference to date between total expenses under operating leases and expenses under constructive capitalization. At the point in time assumed by the analysis, expenses under constructive capitalization would be greater to date, which would result in decreased retained earnings.

Impact on Financial Statements & Ratios: Note that balance-sheet adjustments for constructive capitalization are computed above. There is no income impact for the point in time assumed by this analysis.

Notes

(1) Refer to SFAS No. 13 for a complete list of disclosure requirements (1976).

(2) See the Equipment Leasing Association site, www.chooseleasing.org/Basics/#Benefits, where ELA describes the benefits of leasing: "Because an operating lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement, thus making you more attractive to traditional lenders when you need them."

(3) For example, one RMA Journal reviewer on this article points out that the banking industry would incur a large cost in modifying loan arrangements that have leverage covenants if lease capitalization were to be mandatory. In addition, historical industry data will no longer be comparable.

Contact Bob Kilpatrick by e-mail at bob.kilpatrick@nau.edu; contact Nancy L. Wilburn at nancy.wilburn@nau.edu.

Bob Kilpatrick and Nancy Wilburn are professors of Accounting in the College of Business Administration, Northern Arizona University, Flagstaff, Arizona.