Issue Information ‐ TOC

• Published date: 01 November 2016
• Date: 01 November 2016
• DOI: http://doi.org/10.1002/jcaf.22220

VOLUME 28, NUMBER 1 •November/December 2016

The Journal of

Letter From the Editor

James B. Edwards

Features

Current Issues and Concerns of the SEC and PCAOB

Jack T. Ciesielski and Thomas R. Weirich

This article highlights and summarizes current issues identified by spokespersons of the SEC,

PCAOB, FASB, and IASB at the AICPA/SEC/PCAOB Annual Conference held in December

2015 as being significant. In addition, the authors add some comments concerning potential

actions by these accounting and auditing standards–setting bodies affecting company accoun-

tants, external auditors, and investors.

The Effect of the New Lease Accounting Rules on Profitability Analysis in

the Retail Industry

Stephan Fafatas and Dov Fischer

US accounting principles will soon require companies to capitalize operating leases with

terms longer than 12 months. The new rules will have a dramatic effect on the reported

amounts of assets and liabilities for companies with significant lease commitments. These

changes will also impact common profitability measures that use assets as a base to gauge

earnings performance. We explore the implications of the new lease rules on the EBIT/

Assets ratio, a measure of operating return on assets. We examine 50 firms with the largest

operating lease commitments and find that 22 retail and restaurant companies are most

affected, as their average ratio declines by over 400 basis points from 15 percent to 11

percent based on a hypothetical discount rate of 6% and a lease term of 10 years. A more

comprehensive analysis on a larger group of retailers and restaurants provides additional

evidence on just how significantly the new lease rules will impact this ratio. Our findings high-

light the importance of understanding the implications of the new lease rules on common

methods of financial analysis, particularly when considering those industries that rely heavily

on fixed assets like restaurants and retailers.

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