Proposed Changes in Lease Accounting and Private Business Bankers' Credit Decisions*

This is the authors' abstract. We don't add key points for this paper.

This study contributes to the debate on lease accounting currently ongoing at the international level and to future discussions at the Canadian level for private enterprise standards following a potential revision of lease accounting in international financial reporting standards (IFRS). A user perspective is adopted to examine private business bankers' preferences on the issue of capitalizing all noncancelable lease contracts, including operating leases, as suggested by the G4+1. While bankers use both capital and operating lease information, they give significantly more consideration to the former when analyzing private business loan requests. Accordingly, operating lease information receives less attention than capital lease information in the credit‐granting decision process. In addition, private business bankers consider a number of aspects of the current lease accounting standard to be inadequate and are in favor of the principles governing the approach suggested by the G4+1. They feel that the capitalization of operating leases would improve their ability to evaluate lessees' long‐term financial commitments and increase their estimates of the risks involved in providing financing to lessees. This study also demonstrates that the capitalization of operating leases would have a significant impact on key financial indicators of a sample of Canadian private companies. Bankers perceive that these realistic changes in financial indicators would affect their assessment of borrowers' capital structure/solvency, liquidity, ability to repay, and risk rating. From a cost‐benefit perspective, the findings provide standard‐setters with an indication of the benefits of the G4+1 proposals to users.