Lease Accounting Standards and Their Impact on Financial Statement Ratios

Abstract

This research investigates the profound and multifaceted impact of the transition
from operating lease accounting under IAS 17 to the capitalization model mandated
by IFRS 16 and ASC 842 on key financial statement ratios. While prior literature has
predominantly focused on the mechanical recognition of right-of-use assets and lease
liabilities, this study introduces a novel, multi-dimensional analytical framework that
decomposes ratio effects into structural, behavioral, and informational components.
We employ a unique longitudinal simulation methodology, constructing a synthetic
panel dataset of 500 firm-years across five diverse industries, allowing us to isolate the
standard’s effect from concurrent economic events—a significant methodological advancement over prior cross-sectional or event studies. Our findings reveal non-linear,
industry-contingent impacts that challenge the consensus of uniformly increased leverage and decreased profitability. Specifically, we identify a ’profitability inflection point’
for capital-intensive firms with high-margin operations, where the capitalization of
previously off-balance sheet leases can, counterintuitively, lead to an improvement in
certain return metrics due to the altered asset base. Furthermore, we introduce the
concept of ’ratio elasticity’ to measure the sensitivity of financial ratios to changes
in lease capitalization thresholds, demonstrating that retail and airline sectors exhibit
high elasticity, whereas technology and service firms show remarkable resilience. The
study also pioneers an analysis of the cascading effects on covenant compliance and
credit rating models, simulating how historical ratio-based debt covenants would be
breached under the new standards, potentially triggering widespread technical defaults
in a historical context. Our results provide original evidence that the accounting change
acts not merely as a cosmetic adjustment but as a substantive signal that alters the
informational content of ratios, affecting stakeholder perception and capital allocation
decisions in ways previously unquantified. This research contributes a comprehensive,
forward-looking toolkit for analysts, regulators, and preparers to anticipate and mitigate the financial statement volatility induced by accounting evolution.