Market Reaction to Finance Lease Capitalization from the View Point of Risk Assessment

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The Market Reaction to the Finance Lease Capitalization from the View Point of Risk Assesment* Eiko Sakai Musashi University 1-26-1 Toyotamakami Nerima-ku, Tokyo 176-8534 Phone: +81-3-5984-3774 e-sakai@cc.musashi.ac.jp First Draft April 23, 2010

Abstarcat The purpose of this paper is to investigate whether the market reaction associated with the movement of the finance lease disclosures from footnotes to the body of financial statemetns. I have chosen to examine a Japanese sample because I could obtain enough number of firms which were influenced by the change of accounting standard. The result showed that the market has not reacted on the average about having shifted to recognition from disclosure and the risk of specific industries was revised upward by standard revision. This means that investors were not able to foresee change of lessees’ decision rather than the footnote disclosure was inferior to recognition on balance sheets. Although the results of this paper are concerned with the capitalization of finance leases, they have sume implication for “Leases: Preliminaly Views” released by FASB and IASB. It is not necessary to extend the range of recognition of uncertain assets and liabilities because the footnote infromation is not infrior to the recognized information.

* This work was supported by Grant-in-Aid for Young Scientists (B) 20730312.

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Electronic copy available at: http://ssrn.com/abstract=1594748

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Introduction This paper examined change of risk assesment in the securities market by

information having shifted to balance sheet recognition from footnotes. Under Current Stadards (US and Japanese Standards and IFRS), there are two accounting models for leases, the finance lease model and the operating lease model1. Finance leases are defined as those leases that transfer to lessees substantially all the risks and rewards incidential to ownership of the lease assets, and all othere leases are operating leases. Leases classified as finance leases are treated as similar to purchase transactions and lessees recognize lease assets and obligations to pay rentals. On the other hand, leases classified as operating leases are treated as rental trensactions and lessees recgnize no assets and liabilities, and disclose the additional information such as the amounts of future lease payments in their footnotes. International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB) are making new accounting standard for leases as part of the convergence project. In March 2009, they released the “Leases: Preliminay Views” and pointed the problems with the exising leases accounting standards2; 1) Although users routinely adjust the recognized amounts in an attempt to recognize assets and liabilities arising from operating leases and reflect the effect of lease contracts in profit or loss, the information available to users in the notes to the financial statements is insufficient for investors to make reliable adjustments to the recognized adjustments, 2) the two models

US standrad uses the term ‘capital’ lease rather than ‘finance’ lease. To avoid repetition, this paper uses the term ‘finance’ lease. 2 FASB/IASB [2009], para.1.12. 1

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Electronic copy available at: http://ssrn.com/abstract=1594748

are very different and this means that similar transactions can be accounted for very differently, 3) the lessee has opportunities to structure transactions so as not to recognize leases on their balance sheet, because the lessee obtains a source of unrecognized financing that can be difficult for users to understand. They proposed new accouting model for leases in order to solve the problems. Their proposal has some contravercial problems because they expanded the range of the lease transaction to capitalize not only to the leasing contract which amount of payment has decided but to various options. Originaly, FASB defined the asset and liability in order to limit the range of...
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