Proposed Lease Accounting Changes: Implications for the Restaurant and Retail Industries [Summary]

Abstract

This study investigated the impact of operating lease capitalization on financial statements and financial ratios for firms in the restaurant and retail industries from 2006 to 2008. The results of this study revealed that the magnitude and direction of the impact will be significant for both industry sectors. However, significant absolute and relative differences were also found across industries and within the sectors. If all operating leases are capitalized, all 11 financial ratios related to interest coverage, leverage, and profitability will change significantly and dramatically for both industry sectors. When the results are analyzed by sector and firm size, the findings show that retail firms will be affected by operating lease capitalization to a greater extent than restaurant firms. Within the restaurant industry, smaller firms will face the prospects of significantly higher debt-related ratios than medium or large restaurant firms. In contrast, in the retail sector, medium retail firms will see greater changes in their financial ratios from lease capitalization. This study reconciled previously conflicting results to show that firm size is an important factor in explaining operating lease usage with small firms more likely to use operating leases than large firms. In addition, incrementally new descriptive evidence was provided on retail and restaurant store and rental characteristics.