Abstract
Regulators have proposed changes to the existing lease accounting rules that will require the capitalization of all operating leases as assets and liabilities. This study investigated the impact of operating lease capitalization on the financial statements and 11 financial ratios in restaurant and retail firms from 2006 to 2008. Significant absolute and relative differences were found across and within the two industries. All 11 financial ratios related to interest coverage, leverage, and profitability will change significantly and dramatically for both industry sectors. The findings indicate that retail firms will be affected to a greater extent than restaurant firms. Within the restaurant industry, small restaurant firms will face significantly higher debt-related ratios than medium or large restaurant firms. Reconciling previous research, this study found firm size to be an important factor in explaining operating lease usage with small firms likely to use more operating leases than large firms. Restaurant and retail firms should evaluate the impact of the proposed standard on debt agreements and executive compensation contracts and plan for operating under the new rules.
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