A recent change in how companies are expected to account for and report operating leases on company balance sheets may have delivered a jolt to their share prices, raising questions about how future rules could affect companies’ valuations.
As The Wall Street Journal reports, the initial recognition of operating leases on balance sheets could have led companies’ equity valuations to shrink, new academic research suggests. U.S.-listed public companies with significant operating leases lost stock value, on average, during the quarter in which they first recognized those leases, according to a study conducted by researchers at Florida International University.
Before the rule, which started going into effect in December 2018, public companies disclosed operating leases in the footnotes of their financial statements. The Financial Accounting Standards Board required companies to treat operating leases as liabilities on their balance sheets in a move to heighten transparency for lenders and investors.
For the most part, public companies experienced little more than a one-time shock to their stock returns. But future accounting standards that shift more items from footnotes to liabilities could have similar unfavorable consequences on businesses, says Jonathan Milian, an accounting professor at Florida International University and co-author of the study.
The effect on stock returns was especially noticeable for the retail industry, in which companies traditionally have significant operating leases. Urban Outfitters Inc., Foot Locker Inc., Abercrombie & Fitch Co. and Dick’s Sporting Goods Inc. were among the retailers most reliant on operating leases in their operations, and reported abnormal stock returns around their earnings announcement for the first quarter of 2019, the study says. Read the full story.
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January 29, 2020 at 09:49PM
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