Lease Accounting in Australia: Further Empirical Evidence

Abstract

Key words: Australia; Accounting standard; Efï¬cient contracting; Lease accounting; Signalling

The objective of this study is to examine the economic factors motivating Australian listed lessee ï¬rms to adopt capitalization of ï¬nance leases policy from 1985 to 1987 as permitted by the transitional provision of AAS 17. Capitalization is considered as the preferred accounting policy for ï¬nance leases compared to footnote disclosure. Adopting a joint efï¬cient contracting and quality signaling perspective, support for the research hypotheses would be construed as suggesting that capitalization is a means for lessee ï¬rms to reduce or mitigate agency and/or political costs and concurrently as a signal to the market that they are better quality ï¬rms. The sample consists of3l4 lessee ï¬rms; 67 ï¬rms as capitalizers and 247 ï¬rms 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 efï¬cacy. the results provide evidence that lessee ï¬rms adopted the capitalization as response to the media attention as being politically visible ï¬rms and concurrently as a signal to the market that they are better quality ï¬rms. The evidence also suggests limited usefulness of a lengthy transitional period.