Accounting for lease contracts: The capitalisation debate

Date

1997

Author

Çürük, Turgut

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One of the most common debates on lease accounting is whether financial leases should be capitalised or whether the same information should be disclosed solely in notes to the financial statements. This paper presents arguments for and against capitalisation and discusses possible effects of lease capitalisation. Proponents of capitalisation who consider the economic substance liken lease financing to loan financing and rccommcnd that such transactions be accounted for as such. They believe that capitalisation assists users of financial statements in making comparisons between companies. Opponents, on the other hand, consider the legal form of lease contracts and liken them to executory contracts and rccommcnd that such expenditure to be rccogniscd in the accounts as they accrue. They believe that capitalisation has devastating cffccts on the financial statements and imposes extra accounting burdens particularly for smaller firms. As far as effects of lease capitalisation is conccrncd, previous studies indicate that capitalisation of lease transactions has a substantially negative effect on gearing ratios. Despite some controversial arguments, financial leasing seems a less restrictive form of finance than alternative sources if it is off balance sheet. The arguments about whether lease capitalisation would have an effect on the users of financial statements' assessment of the debt paying ability of the lessee company and whether lease capitalisation would affect stock market prices or not, seem controversial as there is no consistency among the research findings.

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https://hdl.handle.net/11511/111587

Collections

Department of Economics, Article