Abstract

Leases are classified into financial lease and operating lease for accounting purpose, and in case of operating lease, there is unrecorded lease debt. Therefore, firms have incentives to favour operating lease contracts, and this can impede the usefulness of accounting information. For this reason, IASB is preparing new IFRS on lease accounting under which all leases are to be capitalized, and Korea also is going to adopt the new IFRS. If all leases are capitalized according to the new IFRS, firms' lease use can shrink because some accounting numbers including debt ratio can be severely affected, and this is the main reason for lease industry to dislike the adoption of new IFRS. In such a situation, it would be timely to conduct a study on how much accounting numbers are affected by operating lease capitalization,and if operating lease capitalization is desirable for the usefulness of accounting information. Based on these points, this study investigates for the KSE－listed companies how much financial ratios are affected by capitalizing operation lease. And it is empirically tested whether the explanatory power of the regression model, with firm's financial rating and financial ratios being dependent variable and independent variables respectively, is higher in case of operating lease capitalization compared with the case of no capitalization. Main results from the study are as follows. First, operating lease capitalization makes ROA(return on asset) and DR(debt ratio) significantly higher, and ROE(return on equity),COV(interest coverage) and TRN(turnover of PPE) significantly lower. Second, the explanatory power of financial ratios for financial rating is significantly higher when operating leases are capitalized. These results imply that financial ratios are much affected by operating lease capitalization, and capitalizing all leases including operating leases is desirable for the usefulness of accounting information.

Keywords

• Operating Lease
• Capitalization
• Unrecorded Liability
• Financial Ratios
• Credit Assessment

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