Do the Lease Accounting and Disclosure Changes Improve the Information Used in Making Credit Risk Assessments?

The recent change in financial reporting for lease obligations provides an opportunity to assess whether the new disclosures improve the information environment available for credit risk assessments and decision-making. Comparisons of newly reported capitalized operating leases, weighted average lease terms, and weighted average lease rates to those previously estimated under Standard and Poors’ estimation techniques are possible under new requirements in the U.S. The U.S. requirements have retained the classifications of finance and operating leases; while both are now capitalized, they are separately disclosed on the balance sheet. At the same time, the input information used to estimate capitalization of leases under S&P procedures also is still available. In the U.S., reported interest expense still excludes finance charges associated with newly capitalized operating leases. We analyze 2019 financial statements associated with 184 U.S. loan syndication transactions obtained from the Dealscan database and find that capitalized operating leases, disclosed lease terms, and disclosed weighted average discount rates are significantly lower than these amounts as determined by previous S&P estimation methods. Significant differences between newly reported capitalized operating leases, lease terms, and weighted average lease discount rates are surprising given that there has been extensive use of these estimation methods for a long time. We find a significant, positive association between loan spreads and disclosure of large differences in weighted average lease discount rates in comparison to the previously estimated discount rates. We further find evidence that these disclosures resolve asset measurement uncertainty as evidenced by interaction of disclosing extreme differences in lease discount rates by firms with the longest lease terms. These results support the notion that the newly required lease disclosures under U.S. GAAP have improved the information environment for financial statement users in credit analyses and decision-making