Economic impacts of capitalization of operating leases: Evidence from Japan

Abstract

The purpose of this study is to investigate the economic impacts of capitalization of operating leases in Japan. Specifically, this study estimates the ex-ante impacts of capitalization of operating leases by comparing pro-forma accounting numbers based on a proposed rule change with reported accounting numbers under an extant rule. Our findings are twofold. First, capitalization of operating leases has significant impacts on financial ratios, including the debt to equity ratio (DER) and the interest coverage ratio (ICR). Second, the impacts of capitalization of operating leases on these financial ratios are more likely to be large after the adoption of Statement No. 13, Accounting Standard for Lease Transactions. This study contributes to the literature on economic consequences of capitalizing leases and discussions of global convergence of accounting standards.