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Capturing the Benefits of Operating and Synthetic Lease: A Case Study

Directory : Faculty : Intellectual Contributions

Intellectual Contribution by Su-Jane Hsieh

Contribution Title

Capturing the Benefits of Operating and Synthetic Lease: A Case Study

Publication

Journal of Corporate Accounting & Finance

Co-author

Joanne Duke and Yuli Su

Year

2006

Description

Six firms were identified in a recent Wall Street Journal article as major operating lease users in 2003. By applying constructive lease capitalization, a method proposed by Imhoff, Lipe and Wright (1991), on the operating leases of these firms, we demonstrate that even in the post-Enron era (i.e., 2003), companies not only can hide billions of liabilities from financial reporting but also can enhance net income, retained earnings and key financial ratios (i.e., the debt/equity and return on assets ratio) by reporting leases as operating leases instead of capital leases.

In addition, we also demonstrate that had the synthetic leases been structured to allow firms to report leases as operating leases for financial reporting purposes and to claim capital lease status for tax purposes, our sample firms can have, on average, a cumulative tax savings of $674.6 million (or 25.3% of their reported retained earnings).

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