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Accounting for Leases and Off-Balance Sheet Financing: A Case with FedEx and UPS

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Intellectual Contribution by Su-Jane Hsieh

Contribution Title

Accounting for Leases and Off-Balance Sheet Financing: A Case with FedEx and UPS

Conference

Western American Accounting Association annual Meeting

Year

2007

Description

An investor considers whether or not to purchase FedEx stock for her 401(k) retirement plan. Her research identified FedEx as one of the companies with a large amount of off-balance sheet operating lease liabilities. In order to have a better picture of FedEx's financial position, this investor applies constructive lease capitalization, a method suggested by Imhoff, Lipe and Wright (1991, 1997), to the operating leases of FedEx. For comparison purposes, she also performs lease capitalization for UPS, a firm in the same industry as FedEx. She finds that, even in the post-Enron era, both companies were not only able to place billions of dollars of liabilities in the footnotes of their financial statements but also could enhance retained earnings and key financial ratios such as the debt-to-equity and return-on-assets ratios by reporting leases as operating leases. However, she also found that the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.

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