ACCOUNTING FOR LEASES IN SINGAPORE – A VALUE RELEVANCE STUDY

Abstract

The International Accounting Standards Board proposes a new approach to the accounting standard on leases, suggesting that all non-cancelable lease agreements be recognized in the face of financial statements regardless of whether they are classified as finance leases on the balance sheet or disclosed as operating leases in the notes to financial statements. The Discussion Paper cites advantages of capitalization as the relief of users making adjustments to take into account the missing asset and liability, increased comparability and understandability for preparers and users across firms who undertake lease agreements, and the consistency with definitions of an asset and a liability under IASB’s Conceptual Framework’s. I perform an empirical research on whether equity investors view leases in current accounting disclosure as economic liabilities of firms, and the extent to which investors price finance lease obligations and operating lease commitments. My results indicate that equity investors reduce the market value of equity in the presence of finance leases but not of operating leases. This may suggest that the equity investors do not fully understand the economic nature of operating leases. The standard setter can make a more informed decision on altering and improving the standard for leases by requiring that all non-cancelable leases be recognized in the face of the financial statements.