LESSONS LEARNED FROM NEW LEASING STANDARDS: VALUATION IMPLICATIONS OF VARYING IMPLICIT DISCOUNT RATES ACROSS OPERATING AND FINANCING LEASES

Abstract

Under the new accounting standards for leases (ASC Topic 842), assets and liabilities relating to operating leases are recognized on corporate balance sheets. Before the adoption of ASC Topic 842, assets and liabilities relating to operating leases must be estimated by discounting future operating lease payments. Many assumptions are employed in this estimation method, including the timing and amounts of future lease payments, as well as inherent discount rates. New disclosures per ASC Topic 842 reveal that certain commonly used assumptions employed in estimating assets and liabilities related to operating leases are not accurate. This paper outlines a common method used to estimate assets and liabilities related to operating leases, including a detailed example, and discusses the impact of recently revealed assumption errors on valuation estimates.