The joint FASB/IASB lease project: Summary of proposed changes and impact on Lessee financial statements: Working paper series--11-05

This paper describes the major proposed changes to the accounting model for lessees under the joint lease project of the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) and the resulting impacts on lessee financial statements. We compare the current lease accounting rules with the proposed rules under their exposure draft and the likely impacts on key financial ratios. Additionally, we illustrate the impact on key financial ratios from constructive capitalization of operating leases for two similar (size and industry) Global Fortune 500 companies in the retail industry, Kohl's and J.C. Penney's, which employ different levels of operating leases. Our results indicate that debt-to-equity ratio for both companies would increase whereas the return on assets would decrease, with the differences between companies on both ratios becoming much smaller after constructive capitalization. This example of the proposed changes to the lease accounting model demonstrates how users can make more meaningful comparative evaluations of companies that currently have significant levels of off-balance sheet lease financing.