I have been reading a recent paper by Mark Bauman (Univ. of Northern Iowa) and Richard Francis (Univ. of Texas – El Paso) published in Accounting Horizons (June 2011) on the topic of lessor accounting. For those academics who follow this standard setting topic, you already know there is a relative dearth of research that examines lessor accounting. Bauman and Francis offer some useful insights and suggestions that standard setters may want to consider in their ongoing deliberations on lease accounting.

The paper analyzes 57 of the largest publicly traded equipment lessors in the U.S., focusing particularly on disclosure quality, the reporting of residual values, and the balance sheet impact of the so-called performance obligation approach. The key takeaways that I noted include the following:

  • Existing disclosures vary considerably in content and aggregation levels, with some of today’s lessors disclosing essentially nothing at all. The authors argue that given the proposed new standard that provides more latitude in determining what to disclose than current standards do, it is unlikely that disclosures about lessor arrangements will improve.
  • Although current standards require disclosure of unguaranteed residual values, 8 or the 27 firms that disclosed anything at all about leases didn’t specify whether residual values were guaranteed or unguaranteed. The authors argue that standard setters should call for transparent disclosure that indicates the dollar amount of residual values that are guaranteed and not guaranteed.
  • Only 7 of the 27 disclosing firms provide quantitative sensitivity disclosures regarding residual values.
  • The balance sheet effect of eliminating the operating lease classification are not material for lessors. Because of the net presentation proposed in the exposure draft, the impact of the proposed standard on the liabilities-to-assets ratio is minimal.

As the authors point out, some of the most interesting research on lessor issues cannot be done at this point because lessors do not provide uniform transparent information about residual values. However, this paper at least provides a starting point for the discussion of what lessors should be required to disclose under any new accounting standard. If you are interested in this topic, I encourage you to read this paper. It’s short, and more than anything, it underscores how little we know and how little can be known about lessor accounting issues given the paucity of data that exists today. But, perhaps we can hope for better data in the future.