Joint Meeting of the Mid-Atlantic and Northeast Regions

The Effects of ASC 842 on the Value and Risk Relevance of Operating Lease Liabilities

• In Event: Doctoral/Student Faculty Interchange II

Abstract

This paper examines whether and how ASC 842 increases the relevance of operating lease liabilities. We find that ASC 842 increases the value and risk relevance of operating lease liabilities through both the recognition of previously disclosed lease information and additional disclosure of operating lease assumptions. Further analysis indicates that the recognition of previously disclosed operating lease liabilities increases their risk relevance regardless of their reliability levels. More importantly, the lack of value relevance of operating lease liabilities in the pre-ASC 842 period appears to be driven by firms with poor information environment and low information reliability, highlighting the importance of improving both information environment and information reliability to increase the relevance of disclosed accounting items. In addition, we find no evidence that managers choose higher abnormal operating lease discount rates for firms with higher financial leverage, suggesting that managers seem to understand the negative implications of higher discount rates for firm risk and value. Overall, our results are consistent with the standard setters’ view that ASC 842 should increase the relevance and decision usefulness of operating lease liabilities.

Authors

• Kun Yu, University of Massachusetts Boston

• Xin Gu, University of Massachusetts, Boston

• Li Ai, University of Massachusetts Boston