Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Abstract

The Expected and the Unexpected - Topic 842 and Firms Financial Benchmarks

Author(s): Yan Gibson, John R. Kuhn

This study is intended to provide evidential support for the subsequent changes in reported financial data after the new lease accounting standard (Topic 842) was implemented. The researcher utilized the causal-comparative method to test the significance of the year-over-year changes in selected financial ratios. Paired t-test or Wilcoxon was used to investigate the differences in financial performance ratios measuring firms’ asset efficiency, profitability, financial leverage, and liquidity. All firms in the Standard & Poor’s (S&P) Industrial Sector were sampled to test the hypotheses. The testing results showed significant changes in every category of financial performance at the sector level. Compared to non-leasing firms, leasing firms demonstrated more volatilities post Topic 842. Driven by the changes in leasing firms, the industrial sector is more financially leveraged. The expected increase of EBITDA post Topic 842 was not proportional to the increase in Total Assets, leading to profitability deterioration. The implications of unexpected higher cash holding positions in leasing and non-leasing firms extended the significance of Topic 842 from lease transactions to financing transactions. The observed magnitude of changes in financial ratios pre and post-Topic 842 indicated the materiality of operating leases and the importance of operating lease capitalization to reported financial data.

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