Lease capitalization

CFA Level II
#1

If the U.S. adopted the IAS treatment of financial leases, what would happen to the average company’s: Return on equity Current ratio A) Increase No change B) Decrease No change C) Increase Increase D) Decrease Increase

#2

D

#3

A. No change in current because it is a long term asset/liability. Still unclear on the ROE issue. see this prior thread someone else started http://www.analystforum.com/phorums/read.php?12,682534

#4

but if it is under a lease, you would have a lease expense - wouldnt that be part of current liabilities. When you capitalize, your current liability would be reduced since its no longer a rent expense.

#5

D. ROE: due to the lease capitalization, company will recognize the lease as asset; depreciation goes up, this drives down the return. R/E goes down. Current ratio: Current liability goes down since the usual lease expense goes down; CA goes up and CA/CL goes up.

#6

Right, I remember this thread now…I’m starting to think its just another error from schweser, at least according to L1, initially NI will go down because of Dep and interest expense… Dapper425 Wrote: ------------------------------------------------------- > A. > > No change in current because it is a long term > asset/liability. > > Still unclear on the ROE issue. see this prior > thread someone else started > > http://www.analystforum.com/phorums/read.php?12,68 > 2534

#7

Ok that really clears it up for me. Thanks!

#8

In my opinion this is another BS question with no correct answer. lxwqh Wrote: ------------------------------------------------------- > D. > > ROE: due to the lease capitalization, company will > recognize the lease as asset; depreciation goes > up, this drives down the return. R/E goes down. > > Current ratio: Current liability goes down since > the usual lease expense goes down; CA goes up and > CA/CL goes up. The question pertains to operating leases and not capital leases, no? Current ratio is not affected by operating lease. However, the current ratio could be affected by financial lease due to the current portions as the lease amortizes. This could potentially adversely impact the current ratio which is not a choice that we are provided. If assets are depreciated over a short life, then the depreciation charges plus interest could be greater than the lease expense charges for the operating lease which would cause ROE to decline. This is one of the reasons public companies heavily use operating leases as a source of financing.