The economic implications of operating lease capitalization on earnings under ASC 842

Abstract

Purpose This study examines the statistical reliability of the derived earnings impact, defined as the difference in lease expense between an operating lease and the corresponding as-if finance lease. Using post-ASC 842 data, it examines the economic implications of the earnings impact, specifically its information relevance for cash flow prediction and value relevance in assessing firm value, for two distinct earnings impacts: derived (available before and after ASC 842) and reported (available only after ASC 842). Design/methodology/approach The derived earnings impact is estimated using disclosed operating lease information, whereas the reported earnings impact is obtained from operating lease variables reported on the balance sheet, as mandated by ASC 842. Cash flow prediction models and return–earnings models are employed to assess the information relevance and value relevance, respectively, of these two earnings impacts. Findings These two distinct earnings impacts are significantly and positively correlated. Both are information and value relevant, with comparable economic implications. These results confirm the statistical reliability of the derived earnings impact and the economic relevance of both earnings impacts for cash flow predictability and firm valuation in the post-ASC 842 period. Research limitations/implications The estimation of the derived earnings impact follows the approach proposed by Imhoff et al. (1991, 1997); however, alternative methodologies may be explored in future research. Practical implications Our findings extend the literature by validating the continued relevance of the earnings impacts from operating lease capitalization for decision-making and firm valuation under the new lease reporting standard. Originality/value This study compares the reported and derived earnings impacts. The results demonstrate that the derived earnings impact used in pre-ASC 842 studies is both statistically reliable and economically meaningful. The findings extend the literature by validating the persistence of the earnings impact and demonstrating the continued relevance of earnings impacts for cash flow prediction and firm valuation in the post-ASC 842 period.