Lease Accounting in Australia: Further Empirical Evidence

Abstract

Key words: Australia; Accounting standard; Efficient contracting; Lease accounting; Signalling The objective of this study is to examine the economic factors motivating Australian listed lessee firms to adopt capitalization of finance leases policy from 1985 to 1987 as permitted by the transitional provision of AAS 17. Capitalization is considered as the preferred accounting policy for finance leases compared to footnote disclosure. Adopting a joint efficient contracting and quality signaling perspective, support for the research hypotheses would be construed as suggesting that capitalization is a means for lessee firms to reduce or mitigate agency and/or political costs and concurrently as a signal to the market that they are better quality firms. The sample consists of3l4 lessee firms; 67 firms as capitalizers and 247 firms as non-capitalizers. A pooled multivariate cross—sectional analysis for 1985 to 1987 was performed incorporating sensitivity analysis to determine the “best” logistic regression model. This model was then assessed to determine its validity and predictive efficacy. the results provide evidence that lessee firms adopted the capitalization as response to the media attention as being politically visible firms and concurrently as a signal to the market that they are better quality firms. The evidence also suggests limited usefulness of a lengthy transitional period