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Lease Accounting

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Death of the Operating Lease Running head: DEATH OF THE OPERATING LEASE

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Death of the Operating Lease and its Impact on Leading U.S. Companies Mark S. Lynn Mount St. Mary’s University

Copyright 2010, Mark S. Lynn

Death of the Operating Lease Abstract The proposed elimination of operating lease treatment by the IASB and FASB, as outlined in

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their discussion paper, Leases – Preliminary Views, will have a varying degree of impact on U.S firms. After a review of the evolution of lease accounting and a discussion of financial ratio analysis, this paper examines the impact of the proposed accounting change on common financial ratios of 142 large public companies. The proposal requiring the capitalization of all lease arrangements is generally detrimental to such financial measurements, with significant variability among industry sectors. Through surveys and interviews, it is further determined that while a majority of corporate financial executives do not support the proposed accounting change, they have yet to analyze the impact and prepare for the effects of the change within their own companies.

Copyright 2010, Mark S. Lynn

Death of the Operating Lease Death of the Operating Lease and its Impact on Leading U.S. Companies

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“We are only tenants, and shortly the great Landlord will give us notice that our lease has expired.” ~ Joseph Jefferson (1897, p. 476). A lease is broadly defined as a contract by which an owner of property grants to another the right to possess, use and enjoy the property for a specified period of time in exchange for the periodic payment of a stipulated price, referred to as rent (Black, 1979). In general, a lease has two parties to the contract: (i) the lessor, or landlord in the case of a lease of real property, who owns or otherwise controls the property subject to a lease, and (ii) the lessee, or tenant in...

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