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Introduction
On August 17, 2010, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued an Exposure Draft of new lease accounting rules that would fundamentally overhaul and change the way leases are accounted for and reported in financial statements. The proposed rules will eliminate the existing classification of leases as either finance or operating leases, and instead require lessees to capitalize all leases and recognize a single model representing a right-to-use the leased asset.
The proposed changes in lease accounting are expected to impact financial statement presentation and performance measures materially and significantly. The balance sheet effects are currently hidden because of the off-balance sheet treatment of operating leases under the existing lease accounting standard. The material increase in assets and liabilities and deterioration in certain financial ratios has raised concerns about the potential financial implications of the rules on firm debt structure and financial policies such as debt covenants and executive compensation.
Off-balance sheet operating leases have raised questions and concerns because critics have argued that the existing rules allowed companies to understate their liabilities by structuring leases as operating leases instead of capital leases and in doing so, influenced the outcomes of various profitability and debt financial ratios. Furthermore, in 2005, an estimated 293 firms, comprised mainly of restaurant and retail firms, were forced to restate their financial statements due to various lease accounting errors ([26] Scholz, 2008). These restatements were sparked by CKE Restaurants, Inc., which discovered the lease accounting errors during its internal review in 2004. In a 2005 report to Congress, the Securities and Exchange Commission (SEC) was also highly critical of the lease accounting standard and recommended that the FASB overhaul the lease standard ([27] Securities and Exchange Commission, 2005). Subsequently the FASB, working together with the IASB, adopted a project to overhaul the lease accounting rules to address these concerns.
The restaurant industry has been identified in prior research as one of the largest users of off-balance sheet operating leases ([21] Imhoff et al. , 1997). Lease accounting is an important issue for many restaurant firms. Given their pervasive use, magnitude and growing financial lease obligations, the restaurant industry provides an ideal setting for investigating questions of how the proposed rules...