Capitalisation of Operating Lease and its impact on Financial Ratios

Abstract: Purpose - The purpose of this thesis is to simulate how capitalisation of operating lease will affect leverage and profitability ratios in listed Swedish companies; and observe if the use of operating lease has changed since the release of the first exposure draft in 2010. Research design – The study is an ex ante research, simulating a predicted outcome of the new planned lease standard. A deductive and quantitative approach have been used for this comparative study. Secondary data have been collected from 55 Swedish companies listed on NASDAQ Stockholm OMX Large cap and processed with the constructive capitalisation model introduced by Imhoff et al. (1991) to simulate the capitalisation effect on financial ratios. Findings - The result indicates that all financial ratios tested (debt/equity, equity/assets, profit margin, return on assets and return on equity) will have a statistically significant change on all tested years, 2010 – 2013, with a new lease standard. It also show a high correlation between companies’ ratios before and after capitalisation. No trends in the use of operating leasing can be observed from this study.  Contribution – The conclusion of this study suggest that although there is an significant impact on all the companies financial ratios, there would be no big comparability problems, if implementing the new standard. This study supports the change in leasing standard since it would show a truer and fairer picture of companies’ use of leasing and increase the comparability among companies for potential investors. Value – This study brings value and knowledge on the effect of capitalisation on operating leasing on listed Swedish companies. This information are valuable to Swedish companies, investors, other stakeholders and the organisations developing the new standard.