Operating leases: Income effects of constructive capitalization

Lease contracts written in 1994 in the US have been estimated at over $140 billion. The amount of leasing activity continues to grow, particularly operating-type leases which provide a source of off-balance sheet financing. However, a recent publication by an international group of representatives from the FASB and 6 other national and international accounting standard setting bodies suggests that lease accounting should require all lease contracts to be capitalized as assets and liabilities. A study cites evidence that suggests the income statement effects may be material, and illustrates how to estimate the impact of constructive capitalization of operating leases on both operating income and net income.