My question: Which results in a higher return on equity: operating leases or capital leases In the FSA section of Schweser it states the following referring to operating vs. capitalizing leases: “net income in the early years of the lease will be lower for firms with capital leases because the sum of depreciation and interest expense exceeds the lease payment” From QBank: "If the U.S. adopted the IAS treatment of financial leases, what would happen to the average company’s ROE? A. Increase B. Decrease " The answer was A. Increase. The answer description states that the lack of a lease expense would increase profits, which would in turn raise ROE. All of this sounds contradictory to me.
if you substituted “depreciation” for “lease” down in the answer description, it’d sound right. the top part looks right- ROE should be higher in early years with operating leases vs capital leases.