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SYNOPSIS: This archival study addresses whether the presence or absence of ''bright lines'' in a lease accounting standard influences the classification of leases as capital or operating. To the best of our knowledge, our study is the first archival research to address the association between lease classification decisions and the use of U.S. GAAP and IFRS lease accounting standards. We examine firms' lease classification decisions using 2007-2009 data from a matched sample of members of the Fortune Global 500 that report under U.S. GAAP and IFRS. Consistent with experimental work by Agoglia et al. (2011), we find strong evidence that U.S. GAAP firms using a lease standard containing bright-line guidance (i.e., ASC 840) are more likely to classify leases as operating than IFRS firms adhering to a lease accounting standard that lacks the bright lines of the U.S. standard (i.e., IAS 17). Also consistent with Agoglia et al. (2011), we find little evidence of increased dispersion accompanying financial reporting under IFRS. In fact, we find some evidence suggesting the use of IFRS may actually lead to lower dispersion in reporting outcomes.
Keywords: financial reporting; IFRS; leasing; principles-based standards; rules-based standards.
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INTRODUCTION
Principles-based accounting standards are typically characterized as containing clear statements of intent but lacking detailed implementation guidance, while rules-based standards are generally characterized as providing greater detail regarding implementation and compliance (SEC 2003). Taken together, these characterizations imply that, for a given financial reporting scenario, principles-based standards require the accounting professional to exercise judgment, while rules-based standards require professional expertise in researching the authoritative literature.
Most accounting standards, whether U.S. GAAP or IFRS, are to some extent rules based in that they contain rules for entities to follow when accounting for specific transactions. However, accounting standards vary in their degree of specificity, or ''bright lines,'' such that the more specific standards tend to be classified as rules based while the less specific standards are classified as principles based. The U.S. GAAP lease accounting standard (ASC 840) contains a significant amount of bright-line guidance. Meanwhile, the IFRS lease accounting standard (IAS 17) contains far less bright-line guidance, requiring accountants to exercise professional judgment in making reporting decisions. Given the SEC's (2003) categorization of accounting standards described above, it seems...