The Valuation and Disclosure Implications of FIN 46 for
Synthetic Leases: Off-Balance Sheet Financing of Real Property
Carolyn M. Callahan
Doris M. Cook Professor
University of Arkansas-Fayetteville
Angela Wheeler Spencer
Assistant Professor
Oklahoma State University
10/12/06, Draft
Please do not quote or distribute without the express permission of the authors.
*
Corresponding Author
Business Building, 454
1 University of Arkansas
Fayetteville, AR 72701
Phone: (479) 575-6126
Fax: (479) 575-2863
CCallahan@walton.uark.edu
We thank E. Ann Gabriel, Maureen Butler, Kim Church, and Rajesh Narayanan for their insightful
comments on earlier drafts of this paper. We are grateful for the helpful suggestions provided by
workshop participants at Oklahoma State University, University of Memphis, and University of
Oklahoma.
1
Abstract
This study examines the valuation and disclosure impact of Financial Interpretation
Number (FIN) 46 on firms that disclosed involvement as a synthetic lessee with a variable
interest entity (VIE) post-FIN 46. Synthetic leasing firms were chosen for this particular study
because contrasting the disclosures required for these leases as off-balance sheet operating leases
before FIN 46 with the change to a capitalized presentation of these same leases after adoption of
FIN 46 presents an ideal opportunity to examine differences between recognition and disclosure.
We specifically examine whether the differential disclosure and recognition accounting imposed
by FIN 46 to improve financial statement transparency impacts market valuation. Results of this
study indicate that while disclosed future minimum lease payments are significantly valued by
the market pre- and post-FIN 46, financial statement recognized lease liabilities are valued with
substantially more weight following FIN 46. Further, while the new maximum risk disclosures
required under FIN 46 are valued by the market, they do not incrementally add valuation
information beyond the already required lease disclosures.
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I: Introduction
This study examines the market valuation and disclosure impact of Financial Accounting
Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest
Entities on firms that disclosed involvement as a synthetic lessee with a variable interest entity
(VIE) post-FIN 46. The synthetic lease was originally designed as a hybrid financing structure
that allowed a company to have many of the benefits of asset ownership, including capital lease
treatment for tax purposes, while treating lease payments as operating expenses on the firm’s
income statement. Proponents of these transactions argued that the synthetic lease was necessary
to provide economic benefits to the firm and its shareholders. Critics argued that these
transactions (similar to other off-balance sheet liabilities) were severely lacking in financial
statement transparency, a matter of concern to accounting regulators in the wake of recent
corporate financial reporting scandals. The FASB issued Financial Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities, in January 2003 and subsequently revised it in
December 2003. The new guidance included in the Interpretation is specifically directed at the
use of off-balance-sheet entities such as synthetic leases.
Synthetic leasing firms were chosen for this particular study because contrasting the
disclosures required for these structures as off-balance sheet operating leases before FIN 46 with
the change to a capitalized presentation of these same leases after adoption of FIN 46 presents an
ideal opportunity to examine alternative recognition versus disclosure effects. We specifically
examine whether the differential disclosure and recognition accounting imposed by FIN 46 to
improve financial statement transparency impacts market valuation and consider the specific
financing action taken by the firm in response to FIN46.
3
While existing work (Imhoff, Lipe and Wright 1993; Ely 1995; Bauman 2003) supports
the idea that disclosed items are valued by the market, evidence also indicates that recognized
items are valued with more weight than are disclosed items (Davis-Friday et al. 1999; Ahmed,
Kilic, and Lobo 2006). Using market valuation analysis, this study examines this issue further
by evaluating how the market values disclosed lease obligations (both before and after FIN 46)
and recognized lease liabilities (post-FIN 46). Of additional interest are the expanded VIE
disclosures required under FIN 46, in particular, the “maximum risk” disclosures required for
firms with significant VIE relationships that are not consolidated. While existing evidence
shows that disclosures providing supplemental information to recognized amounts are
significantly considered by the market (Barth, Beaver, and Landsman 1996; Graham,
Lefanowicz, and Petroni 2003) and experimental evidence suggests that detailed disclosures
about loss outcomes influence financial statement users (Koonce, McAnally, and Mercer 2005),
valuation analysis of this issue provides evidence as to whether additional disclosures of this
nature augment those disclosures already required. Finally, considering that a substantial body
of evidence supports the idea that increased disclosure is viewed positively by the market, firm
reaction to FIN 46 is also considered. Even though FIN 46 mandates accounting changes, firms
still could have chosen to restructure or unwind their VIEs to avoid having vehicles that fell
under the purview of FIN 46. However, because prior research (Botosan 1997; Botosan and
Plumlee 2002) has established that the market responds more favorably to greater disclosure, a
firm’s willingness to comply with FIN 46 (rather than divest or restructure the VIE) could lead to
a positive impact on market value.
Results of this study indicate that while disclosed future minimum lease payments are
significantly valued by the market pre- and post-FIN 46, lease liabilities recognized in the
4
financial statements are valued with substantially more weight following FIN 46. Further, while
the new maximum risk disclosures required under FIN 46 are valued by the market, they do not
incrementally add valuation information beyond the already required lease disclosures.
Further, the firm’s choice of whether to follow the provisions of FIN 46 or to restructure or
divest the lease arrangement does not appear to be significantly valued by the market.
The evidence of significant differences between recognition and disclosure of recognized lease
liabilities post-FIN 46 has the potential to contribute to the ongoing lease accounting debate.
For instance, the Securities and Exchange Commission, in a 2005 report on off-balance-sheet
activity commissioned by Congress as part of the Sarbanes-Oxley Act of 2002, argued that
general
lease accounting standards should be rewritten, estimating that they allow publicly traded
companies to keep $1.25 trillion (undiscounted) in future cash obligations off their balance
sheets.
The remainder of this paper proceeds as follows: Section II: Institutional Background
Section III: Prior Literature; Section IV: Hypotheses Development; Section V: Sample
Selection and Statistical Analysis VI: Results and Conclusions.
II: Institutional Background
Financial Interpretation Number (FIN) 46
Variable interest entities, a term introduced by FIN 46 and defined by that standard, are
those entities that have one or more of the following characteristics1:
1. The equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support provided by any
parties, including the equity holders.
2. The equity investors lack one or more of the following essential characteristics of
a controlling financial interest:
1
All excerpts and quotes attributed to“FIN 46” in this chapter are taken from the revised version, FIN 46(R).
5
a. The direct or indirect ability through voting rights or similar rights to
make decisions about the entity’s activities that have a significant effect
on the success of the entity.
b. The obligation to absorb the expected losses of the entity.
c. The right to receive the expected residual returns of the entity.
3. (i) The voting rights of some investors are not proportional to their obligations to
absorb the expected losses of the entity, their rights to receive the expected
residual returns of the entity, or both and (ii) substantially all of the entity’s
activities either involve or are conducted on behalf of an investor that has
disproportionately few voting rights.
VIEs, part of the broader category of special purpose entities (SPEs), have long been used
to carry out specific activities and transactions, such as leasing equipment back to the parent
company, securitization of accounts receivable, and research and development. Although these
vehicles were used beginning in the 1970s to handle a wide variety of transactions, popularity of
at least some of these arrangements seems to have increased in recent years. For example, a July
2004 article reported that in 1999, securitization and synthetic lease SPEs constituted a total of
$50,660 million; by 2001, this total had increased to $229.774 million (Sorrosh and Ciesielski
2004). But, with only minimal financial statement disclosure, SPEs weren’t widely discussed
for most of their history.
With FIN 46, the FASB altered the requirements for consolidation of VIEs,2 requiring
enhanced reporting in the financial statements and notes of the parent firms. FIN 46 was enacted
with the stated goals of improving financial reporting by (a) generating greater consistency
across firms with regard to consolidation policies and (b) enabling financial statement users to
more effectively measure each entity’s risk through increased note disclosure (7).
As described in ARB 51 (and as cited in FIN 46), consolidated statements are “usually
necessary for a fair presentation when one of the companies in the group directly or indirectly
2
Other classes of SPEs, for example qualifying SPEs (QSPEs) and SPEs of governmental and not-for-organizations,
are not impacted by FIN 46. QSPEs are allowed to remain off-balance sheet via the provisions of SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguisment of Liabilities.
6
has a controlling financial interest in the other companies (¶1).” Under ARB 51, “the usual
condition for a controlling financial interest is ownership of a majority voting interest . . . (¶2).”
However, as VIEs have non-traditional structures, ARB 51 was generally not sufficient to force
consolidation by the appropriate parties because, as FIN 46 notes, the “controlling financial
interest may be achieved through arrangements that do not involve voting interest (¶1).”
To rectify this situation, FIN 46 mandates a new process for determining whether or not a
variable interest entity should be consolidated. At issue first is whether the firm has a variable
interest in a variable interest entity (see above for a description of the term “variable interest
entity”). Under FIN 46, “variable interests” are “contractual, ownership, or other pecuniary
interest in an entity that change with changes in the fair value of the entity’s net assets exclusive
of variable interests (emphasis added) (¶2).
Once it has been established that the firm holds a variable interest in a variable interest
entity, at issue next is whether the firm is the “primary beneficiary.” FIN 46 defines the primary
beneficiary as the firm that has the variable interest which will absorb a majority of the entity’s
expected losses, receive a majority of the entity’s expected residual returns, or both (¶14).” If
the firm is found to be the primary beneficiary, the VIE is consolidated, following the same
methodology utilized under ARB 51. By requiring consistent consolidation (regardless of the
particulars of each contract), based on the risk and rewards underlying each leasing arrangement,
FIN 46 quite closely implements the recommendations made by the AAA Financial Accounting
Standards Committee in 2001.
In cases where a firm holds a significant interest in a variable interest entity but the
requirements for consolidation (under FIN 46) are not met, the firm must still make certain
disclosures. Specifically, the firm must disclose the nature of its involvement with the VIE, the
7
scope of that involvement, and the firm’s maximum exposure to loss due to its involvement with
the VIE. This last disclosure is of particular interest because it requires the firm to quantitatively
disclose its at risk position in the VIE. Maximum risk disclosures made following FIN 46
included a wide variety from items. Some, such as minimum lease payments and guaranteed
residual values related to leases had previously been disclosed in a standard format (due to the
fact that synthetic leases were treated as operating leases for financial reporting purposes prior to
FIN 46). Others, such as loan guarantees for a third party, did not necessarily receive standard or
complete disclosure prior to FIN 46. Conceivably, such disclosures should have better informed
the market (at the very least drawing more attention to previously disclosed amounts) but what is
still unknown (and what this study in part seeks to answer) is whether such disclosures
incrementally impacted firm valuation by the market.
Synthetic Leases
Arising after the collapse of the traditional real estate financing market in the late 1980s
and early 1990s, synthetic leases were initially used by only a limited number of firms seeking to
fill a financing void. However, fueled by the technology boom of the 1990s, synthetic leasing
became a much more commonplace financing vehicle, used by rapidly growing firms and others
in need of low cost capital financing (Ratner 1996). These structures promised numerous
benefits, from direct effects such as favorable tax treatment, to indirect effects such as improved
market valuation due to the off-balance sheet treatment of the leases. However, in order to
achieve the touted benefits, exact structuring of the synthetic lease was required.
In general terms, a synthetic lease was one that met FASB guidelines to qualify as an
operating lease, but also met IRS guidelines to qualify as a capital lease (Dorsey 2000). In a
synthetic lease, the leasing firm created a special purpose entity (SPE) structured solely to obtain
8
a particular asset and secure sufficient financing for the asset’s purchase. Typically, this
financing was obtained through a 3% equity investment (from a source external to the lessee)
and a 97% debt interest (Little 2002) (See Figure 1). By securing a 3% equity interest from an
outside party, under EITF 90-15, the equity interest was deemed to be “substantive” and the
equity holder “at risk,” thus preventing the lessee from consolidating the SPE (Ratner 1996).
Further, the leasing arrangement was structured such that all four capitalization criteria of SFAS
No. 133 were not met, thus qualifying the lease for operating, rather than capital, lease treatment
(Evans 1996). Such a structure, however, was not without risks as the lessee firm typically
guaranteed the debt used to finance the asset purchase (Muto and Veverka 1997).
The most obvious effect from such a structure was that the lease remained largely out of
the financial statements of the lessee. By qualifying as an operating, rather than capital, lease
SFAS No. 13 only required that the lease payments be expensed on the income statement and the
future minimum lease payments disclosed in the notes to the financial statements. By achieving
off-balance sheet treatment for the lease, lessee firms hoped to obtain several benefits, including
improved reported earnings (due to the avoidance of the reporting of depreciation expense),
improved financial ratios (due to enhanced earnings and lower asset and liability totals on the
balance sheet) and improved market valuation (due to improved earnings and balance sheet
position) (Muto and Veverka 1997; Ratner 1996).
The second major set of benefits from this lease structure involved the favorable tax
treatment afforded the lease. By virtue of the fact that the lessee bore the long-term burdens and
benefits of property ownership with relation to the leased asset, the IRS criteria for a “conditional
sale” were met, allowing the lessee to deduct both depreciation and interest associated with the
(1) Transfer of ownership, (2) bargain purchase option, (3) lease term is greater than or equal to 75% of the asset’s
economic life, or (4) the present value of the minimum lease payments are greater than or equal to 90% of the fair
value of the asset.
3
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lease on the corporate tax return (Muto and Veverka 1997). Thus, by utilizing a synthetic lease,
the lessee firm was able to have the best of both worlds: minimize the lease’s presence in the
financial statements, but maximize it on the tax return.
Further expected benefits of the synthetic lease structure included:

Enhanced cash flow (when compared to traditional financing). Synthetic lease
payments were typically structured to equal debt service (generally interest only)
and a minimum return to the equity holders. Further, synthetic leases generally
provided 100% financing for a given project (Little 2002).

Lower financing costs. In most cases, the SPE’s loan was “double-backed” by
both the collateralized asset and the lessee’s credit. Additionally, SPEs were
usually considered “bankruptcy remote.”4 Such features often allowed the lessee
to save between 2 ½ to 3% interest points when compared to traditional financing
mechanisms (Muto and Veverka 1997; AAA Financial Accounting Standards
Committee 2003).

Retention of property appreciation. Lessees were generally able to retain any
property appreciation due to the fact that most of these lease agreements
contained a fixed purchase price clause (Little 2002).

Lowered transaction costs. Lowered costs associated with the property itself
often resulted due to the transaction economic benefits that were available due to
the “all in” nature of the SPE structure (Evans 1996).
Under FIN 46, the financial statement treatment of synthetic leases is only impacted if the leases
are held by a special purpose entity (SPE) that has been determined to be a variable interest
4
The assets of the SPE cannot be drawn upon to satisfy bankruptcy claims against the sponsoring firm.
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entity (VIE) in which the controlling interest is held by the lessee. In that case, the lessee must
consolidate the VIE for financial reporting purposes (Danvers, Reinstein, and Jones 2003). As
noted above, synthetic lease structures typically involved three parties: the tenant, the landlord,
and the lender. The landlord (nominal owner), in most cases, purchased the property in question
strictly based on the tenant’s commitment to lease the property and the tenant’s corporate credit
(Dorsey 2000). Such arrangements, with benefits accrued by a party other than the technical
owner (lessor SPE) of the property, clearly fall under the scope of FIN 46.
III: Prior Literature
The FASB has always maintained that disclosure and recognition serve different
purposes. As outlined in SFAC No. 5, and highlighted by Johnson (1992) “although financial
statements have essentially the same objectives as financial reporting, some useful information is
better provided by financial statements and some is better provided, or can only be provided, by
notes to the financial statements or by supplementary information or other means of financial
reporting (¶7) and “generally, the most useful (emphasis added) information about assets,
liabilities, revenues, expenses, and other items of financial statements and their measures (that
with the best combination of relevance and reliability) should be recognized in the financial
statements (¶ 9).” Therefore, if the market considers the FASB’s Conceptual Framework, it
should perhaps not value disclosed items in the same manner as those that are recognized.
Further, given the volume of disclosures that are currently required by GAAP, some
wonder if there might not be a problem with “disclosure overload (Johnson 1992).” That is, does
too much required information in annual reports prevent some information from receiving proper
consideration?
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Such issues lead to the two questions at the heart of this study. First, does the market
value disclosed and recognized items differently? Second, did the recognition and disclosure
provisions of FIN 46 impact market valuation? Such analyses draw upon a variety of literatures,
including that which examines the incremental valuation impact of disclosures and differences
between disclosure and recognition. Analysis of these works seems to indicate that while the
market does indeed value disclosed items, they receive less emphasis than items recognized in
the financial statements.
Although it can be gathered from Statement of Financial Accounting Concepts No. 5 that
disclosure and recognition are not substitutes, there is evidence that the market does value items
that are disclosed but not recognized. Existing work, consistent with the efficient market
hypothesis, provides support for the idea that the market does price disclosures. Two of these
studies, Imhoff, Lipe and Wright (1993) and Ely (1995), find that investors constructively
capitalize operating lease disclosures when assessing equity risk. That is, the market is not
deceived by the fact that operating leases are disclosed in the notes rather than recognized in the
financial statements. Likewise, in a study examining the effects of off-balance sheet activities
that are “concealed” by the equity method of accounting, Bauman (2003) finds that the market
significantly considers footnote disclosures to value off-balance sheet obligations “concealed” by
the equity method of accounting. Considering these studies, it seems highly likely that the
valuation of VIEs (for which footnote disclosure and income statement recognition was provided
pre-FIN 46) would follow a similar pattern. Thus, for many VIEs, in particular those involving
leases, the market was likely informed (to some degree) about these off-balance sheet activities
prior to FIN 46.
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Although disclosures are priced, a study of SFAS No. 106 (involving post-retirement
benefits) found that modest (and model-sensitive) evidence does exist to indicate that the market
values items on the balance sheet more strongly than those that are simply disclosed (DavisFriday, et al. 1999). Likewise, Imhoff, Lipe, and Wright (1993) found that, although operating
leases are considered by the equity markets, they are only naively valued and are not considered
in determining executive compensation. Further, in a study centering on derivative disclosure
and recognition change surrounding SFAS No. 133, Ahmed, Kilic, and Lobo (2006) found that
only recognized derivative information is significantly valued. In her Presidential Lecture at the
2005 American Accounting Association annual meeting, FASB board member Katherine
Schipper suggested, consistent with the Conceptual Framework, that this difference in valuation
may be due to the perception that disclosed items are less reliable (and thus should be assigned
less weight) than those that are recognized. Experimental evidence supports this notion, finding
in fact that the choice of whether to disclose or recognize an item may impact reliability, as
auditors are more likely to allow misstatements in lease and stock compensation amounts that are
disclosed rather than recognized (Libby, Nelson, and Hunton 2006).
Considered together, these results seem to indicate that, although VIEs may have been
considered prior to FIN 46, it is likely that they were not valued at their full weight until they
were recognized. If this difference is due to perceived greater reliability associated with
recognition in the financial statements (as opposed to disclosure in the footnotes), it seems
reasonable to assume that a wealth effect would be experienced following the market’s
consideration of firms consolidating VIEs under FIN 46. Because equity prices are established,
in theory, based on the market’s expectation about the future performance of the firm and the
perceived risk associated with this performance, greater reliability assigned to estimates of risk
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should decrease the expected value of the equity interest. Further, investors purchase securities
with the expectation that they are assuming a given amount of risk (which can be diversified
away) in exchange for a given return. However, if it is the case that the return is in fact less than
what was originally perceived (prior to the consolidation of VIEs under FIN 46), investors may
divest from the security once the “real” return is more clearly revealed (i.e. post-FIN 46). Thus,
a wealth effect is expected once firms consolidate VIEs following implementation of FIN 46.
In a second group of studies, disclosures augmenting recognized items are examined. Of
these, Barth, Beaver, and Landsman (1996) find that fair value disclosures regarding loans
provided additional information which incrementally informed the market beyond the recognized
book values. Similarly, Graham, Lefanowicz, and Petroni (2003) find that fair value disclosures
for equity method investments have significant explanatory power. Further, experimental
evidence indicates that detailed disclosures about potential loss outcomes heavily influence
financial statement users (Koonce, McAnally, and Mercer, 2005). From these results, it seems
likely that maximum risk disclosures, even if ancillary to already recognized or disclosed
amounts, should possess significant explanatory power.
In addition to evaluating how this “new” information impacted the market’s assessment
of the risk associated with the firm’s financial obligations, a second issue is whether FIN 46
allowed better evaluation of the risk associated with management financing and disclosure
choice. For any number of reasons (contracting, debt covenants, etc.) management of these firms
established off-balance sheet arrangements that would allow them to limit the amount of
disclosure provided to the market. Once FIN 46 was effective, some firms adopted its
provisions, either consolidating or disclosing their VIEs, while others promptly restructured their
financing arrangements to avoid consolidation or disclosure. Such actions can be interpreted to
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signal something about the firm’s disclosure policies. Thus, for those firms that were more open
with their information flow (consolidating or disclosing VIEs), a more positive/less negative
reaction is expected when compared to those firms that opted to be less forthcoming (divesting
VIEs) with their information flow. Such an expectation is based, in part, on evidence from
Botosan (1997) and others which provides evidence that a negative relationship exists between
cost of capital and disclosure level.
Considering the literature that exists, the first basic question proposed is this: what is the
valuation impact of FIN 46 for firms that engaged in synthetic lease operations? The second:
how did the firm’s response to FIN 46 impact market valuation? The third: did maximum risk
disclosures, as required by FIN 46, incrementally inform the market? The answers to these
questions should be of interest to managers, who must make financing and disclosure choices
and to regulators, who are interested in both the impact of such activities and the impact of new
reporting requirements.
IV: Hypotheses Development
Based on evidence that supports the idea that disclosures, particularly those involving
operating leases, are valued by the market, it seems reasonable to expect that for lessee firms of
lease VIEs, the disclosures made about these leases were considered prior to FIN 46. However,
based on the evidence contrasting disclosures with recognized items, it also seems highly likely
that the market more strongly valued consolidated lease liabilities, post-FIN 46, than it did
disclosed abbreviated lease liabilities prior to FIN 46. Thus,
H1: Recognized synthetic lease liabilities are valued with greater weight than are disclosed
lease liabilities.
Further, based on evidence that supports the idea that the market responds more favorably
to firms with more open disclosure policies, it seems that once the market becomes aware of a
15
firm’s synthetic lease activities, the market valuation may be different depending on which
action the firm takes regarding its VIE. It could be the case that, due to increased transparency
of the financial statements, the market would reward those firms which consolidate or disclose
the VIE lessor, thus revealing the assets and liabilities associated with the lease. On the other
hand, it could also be the case that the market might reward those firms that divest the synthetic
lease arrangements by buy-out or refinancing, thus disentangling the firm from financing that
may be perceived as “risky.” Thus,
H2: A differential valuation impact will be experienced depending on the action taken by
the firm regarding its synthetic lease.
Due to the fact that it is unclear how the market should react, no directional prediction is
made with regard to this hypothesis.
Although off-balance sheet leases receive standard footnote disclosure and even though
most of the sample firms consolidated the VIE leases upon adoption of FIN 46 (See Table 1),
based on existing evidence that supplementary disclosure is significantly considered by the
market, it seems reasonable that maximum risk disclosures (required under FIN 46) are valued
by the market. Further, because these disclosures specifically refer to maximum risk, it seems
reasonable that these disclosures should be negatively valued. Thus,
H3: Post-FIN46, maximum risk disclosures are negatively related to market valuation.
V: Sample Selection and Statistical Analysis
To gather data on firms with synthetic lease VIEs, a 10-K Wizard search of annual
reports filed in 2004 was undertaken. 2004 was the year of choice due to the fact that FIN 46(R)
was adopted in December 2003, therefore the first 10-K reports filed under the complete
pronouncement appeared in 2004. For the bulk of firms in the sample, the 10-K filed in 2004
represents the filing for the fiscal year ended in 2003. For ease of explanation, all 10-Ks filed in
16
2004 are referred to as the “2003” filing. Corresponding to this, the filing from the year before is
referred to as the “2002” filing. That is, the “2003” filing is post-FIN 46 adoption and the
“2002” filing is pre-FIN 46 adoption.
Searching for all occurrences of “FIN 46” and “variable interest entity/entities,” this
search initially revealed 148 firms which disclosed the impact of FIN 46 on a particular lease
VIE. It should be noted that not all of these firms referred to these leases as “synthetic;”
however, as all of these arrangements involved a VIE, it seems reasonable to expect that they
were all similar in nature. Of these 148 firms, 21 lacked complete data for both 2002 and 2003
in either Compustat and/or CRSP and were eliminated from the sample, leaving 127 firms for
analysis.
To control for the impact of risk on valuation, a matched sample was also examined.
This matched sample was chosen from the population of firms which disclosed future minimum
lease payments in the 10-K filed in 2004 (Compustat Data 95>0). These firms were matched to
the VIE firms based on the 2003 one-year beta estimate (estimated using the market model and
value-weighted market returns). See Figure 2 for illustration of the change in accounting
treatment for the samples examined in this study.
To examine H1, and study whether recognized lease amounts are valued more strongly
than disclosed lease amounts, methodology similar to Davis-Friday et al (1999) and Bell et al.
(2002) is employed. Valuation models are examined for 2002 (pre-FIN 46), 2003 (post-FIN 46),
and for both years combined:
17
Model #1:
MVEit  1CONSTANT   2 BVAit   3 nBVLit   4 BETAit   5 AEARN it   6 NEGEARNit
  7 MULTIPLE   8 REC _ LEASEit   9 DISC _ LEASEit   it
Where:
MVE =
per share price of stock (PRC from CRSP) three months (following DavisFriday et al, 1999) after the fiscal year end. Market price three months after
the fiscal year end was chosen to allow the market adequate time to assimilate
information about the impact of FIN 46.
CONSTANT = 1/shares outstanding at fiscal year-end (following Bell, et al., 2002)
BVA =
total assets divided by shares outstanding at fiscal year-end.
nBVL =
total liabilities less consolidated lease VIE liability, divided by shares
outstanding at fiscal year-end
BETA =
12-month BETA for 2002 and 2003, estimated using the market model. Beta is
incorporated to control for the impact that risk is expected to have on the
market’s evaluation of additional obligations.
AEARN =
abnormal earnings computed as income before extraordinary items less
expected earnings (prior year’s book value * .12) (following Bell et al., 2002),
divided by shares outstanding at fiscal year-end.
NEGAEARN = abnormal earnings, if negative, divided by shares outstanding at fiscal yearend.
MULTIPLE = 1 if the firm disclosed more than one VIE in the context of the FIN 46
adoption.
REC_LEASE = lease liability recognized on the balance sheet, either by consolidation of the
VIE or purchase of the leased asset, as disclosed in the “new pronouncements”
footnote. Divided by shares outstanding at fiscal year-end.
DISC_LEASE = the present value of the disclosed future minimum lease payments
(Compustat Data 95+ Data 389), assuming the life of the lease can be
determined by dividing the total of the minimum lease payments by the
average payment as determined by Data95/5, the incremental borrowing rate is
10% (following Ely, 1995), and the estimated total life of the lease is equal to
total minimum payments divided by the average payment. Divided by shares
outstanding at fiscal year-end.
The method to evaluate DISC_LEASE was chosen (as opposed to an 8 * rental expense
heuristic used in some studies) because, based on the information available, this most closely
follows the method required when capitalizing capital lease liabilities and is also similar to the
method utilized by Standard and Poor’s for rating purposes (Standard and Poor’s, 2006).
Further, as it is not possible, in most cases, to assign an asset value to leases that receive only
18
operating lease disclosure, in order to compare like items, only the liability side of the
consolidated leasing arrangements are extracted from the book values.
While it is expected that both REC_LEASE and DISC_LEASE will be valued negatively,
based on prior evidence, recognized lease liabilities (REC_LEASE) are expected to receive more
weight (i.e. a larger coefficient) than disclosed lease liabilities (DISC_LEASE).
Of the firms examined, six distinct actions (as categorized in Table 1) were taken
following announcement of FIN 46. However, for purposes of this analysis, firms will either be
considered to have directly “complied” with FIN 46 if they consolidated or disclosed the VIE
and to have “not complied” if any other action was taken. To evaluate H2, as to whether firm
action influences the market, two additional variables, COMPLY and NOCOMPLY are added to
the basic model discussed above.
Model 2:
MVEit  1CONSTANT   2 BVAit   3 nBVLit   4 BETAit   5 AEARN it   6 NEGEARNit
  7 MULTIPLE   8 REC _ LEASEit   9 DISC _ LEASEit  10 ACTION it  11 ACTION 2 it   it
Where:
COMPLY =
1 if the firm consolidated or disclosed the VIE and 0 otherwise.
NOCOMPLY = 1 if the firm restructured, purchased, consolidated then purchased or terminated
the VIE
To investigate H3, whether or not the additional “maximum risk” disclosure required
under FIN 46 is valued by the market, the following model is considered:
19
Model 3:
MVEit  1CONSTANT   2 BVAit   3 BVLit   4 BETAit   5 AEARN it   6 NEGAEARNit
 7 MULTIPLEit   8 DISC _ LEASEit   9 MAX _ RISK it   it
Where:
BVL =
total liabilities, divided by shares outstanding at fiscal year-end
MAX_RISK = For firms with significant, but not primary interest in the lessor VIE, the
maximum exposure to risk disclosed in the notes to the financial statements.
VI: Results and Conclusions
As presented in Table 4, the initial examination of Model 1, pooling years 2002 and
2003, reveals that while REC_LEASE and DISC_LEASE (with coefficients of -0.61 and -0.14,
respectively) are both negatively valued, consistent with existing evidence, REC_LEASE is
more heavily valued and a t-test shows the difference between these two coefficients to be
significant (t=5.85). Therefore, as predicted, disclosed lease liabilities are valued with less
weight than are recognized liabilities.
Yet, with the initial model, the coefficient on DISC_LEASE (-.14) is small and a
significant departure from the expected value of 1.0. Considering perceived differences in
reliability between disclosed and recognized items, this value could perhaps be explained.
However, when an additional term, DISC_LEASE*MATCH, was allowed to enter the equation
(so that the impact on valuation for the matched (non-VIE) firms could be examined separately),
a different picture emerges. Curiously, in the pooled results, this coefficient
(DISC_LEASE*MATCH) is significantly positive, with an estimated coefficient of 2.47.
Further, this result holds true for both the pre-FIN 46 (2002, with an estimate of 1.93) and postFIN 46 (2003, with an estimate of 2.47) periods. Further, in 2002, while still negative, the
20
coefficient on DISC_LEASE for the all firms is insignificant. Such results would seem to
indicate that, for the matched firms, disclosed leases are valued more positively (less negatively)
than they are for the VIE firms. While this is an issue that warrants further examination, it is
beyond the scope of the current study.
In Table 5, the results of Model 2 are presented. For the COMPLY and NOCOMPLY
variables, coefficients of 10.78 and 12.26, respectively, are estimated. From these results, it
seems that “complying” with FIN 46 (that is, either consolidating or disclosing involvement in
the VIE rather than divesting the firm’s interest) generates positive valuation implications not as
large as actions by firms that did not directly comply with the pronouncement. However, as
these effects are not statistically different from one another (t=0.20), it appears that the fact that a
firm “complies” with FIN 46 does not statistically distinguish it from firms that do not “comply.”
In Table 6, the results for Model 3 are presented. From the original model, MAX_RISK
with an estimated coefficient of -0.21 clearly has negative implications (as expected) on firm
valuation. Notice however, that this coefficient estimate is very similar to that found on earlier
models estimating DISC_LEASE. Therefore, it appears that the market does not value more
heavily the MAX_RISK disclosure than it does the DISC_LEASE amounts. Further, as can be
seen from the expanded specification of this model (also presented in Table 6) the MAX_RISK
disclosure is not incrementally informative above the DISC_LEASE amounts as the coefficient
on MAX_RISK becomes insignificant once DISC_LEASE is added to the model. That is, while
the maximum risk disclosures are valued by the market, they do not incrementally inform
beyond the already required lease disclosures.
A finding consistent throughout these results is that the control variable MULTIPLE is
positive, in most cases, significantly so. Such a finding warrants further investigation as it seems
21
to perhaps indicate that the market either views these firms with multiple VIEs in a different
manner due to the fact that they are involved with multiple VIEs, or perhaps because there is
some determinant about these firms that causes them to be valued differently than single-VIE
firms.
Results of this study indicate that while disclosed future minimum lease payments are
significantly valued by the market pre- and post-FIN 46, financial statement recognized lease
liabilities are valued with substantially more weight following FIN 46. Further, while the new
maximum risk disclosures required under FIN 46 are valued by the market, they do not
incrementally add valuation information beyond the already required lease disclosures.
Further results from this study also show that the market values operating leases related to firms
with VIEs in a different manner than it values operating leases from firms with similar market
risk, but without VIEs. Uncovering the underlying reason for this difference will likely involve
further exploration of risk measures, financing choice, and other determinants of market
valuation in this setting.
Contrary to expectations, the fact that firms “complied” with FIN 46 did not seem to have
any implication for firm valuation. However, this measure of firm behavior is not a refined one,
and further examination of this issue may be warranted. Finally, while the maximum risk
disclosures relating to lease VIEs are significant when considered alone, they do not
incrementally add information for firm valuation when disclosed operating lease amounts are
also considered. This is not a particularly surprising result due to the uniform nature and
valuation of operating lease disclosures. However, for other firms that did not have uniform
disclosures relating to their particular VIEs prior to FIN 46, it would be expected that the
maximum risk disclosures add greater amounts of information.
22
In summary, while FIN 46 appears to have added incremental information when lease
VIEs were consolidated, it does not appear to have added additional information when
relationships with lease VIEs were merely disclosed. Such results should be of interest to
regulators concerned with the impact of FIN 46 on market efficiency and to corporate managers
concerned with the impact of financing and disclosure choice on market valuation.
23
Table 1
Descriptive Statistics
Panel A: Firm SIC Composition
Group
VIE Firms
Agriculture, forestry, and fishing (SIC Codes 01-09)
0
Mining and construction (SIC Codes 10-17)
4
Manufacturing (SIC Codes 20-39)
49
Transportation, communications, electric,
gas, and sanitary services (SIC Codes 40-49)
24
Wholesale and retail trade (SIC codes 50-59)
20
Finance, insurance, and real estate (SIC Codes 60-67)
11
Services (SIC Codes 70-89)
19
Total
Match Firms
4
10
57
Total
4
14
106
14
14
6
22
38
34
17
41
127
254
127
Panel B: Firm Action
Action
Consolidated the VIE lessor under the provisions of FIN 46
Disclosed a significant interest in a VIE lessor
Bought the lease or otherwise purchased the property underlying the lease
Consolidated the VIE lessor and subsequently purchased the associated property
Restructured the lease so that it would qualify as an operating lease
Terminated the lease
Disclosed no effect from FIN 46 on the treatment of the lease
Total
Number of Firms
59
15
11
9
14
2
17
127
24
Table 2
Descriptive Statistics – Including both Pre- and Post-FIN 46 Adoption Periods
In Millions of Dollars per Share
Panel A: VIE Sample
Variable
Mean
Std. Dev.
Min.
Max.
MVE
25.63
28.49
.25
335
BVA
61.74
117.25
1.43
1056.33
BVL
46.70
91.38
.27
753.10
AEARN
-7.73
29.74
-309.87
25.61
REC_LEASE
.83
5.77
0
86.31
DISC_LEASE
6.83
18.72
.06
157.88
MAX_RISK
1.62
13.83
0
196.38
Panel B: Match Sample
Variable
Mean
Std. Dev.
Min.
Max.
MVE
17.07
15.67
.15
80.25
BVA
19.54
22.06
.11
125.25
BVL
10.83
14.89
.05
78.77
AEARN
-6.01
14.01
-113.04
6.95
REC_LEASE
0
0
0
0
DISC_LEASE
1.13
2.06
0
11.97
0
0
0
0
MAX_RISK
_____________________________
MVE
BVA
BVL
AEARN
=
=
=
=
per share price three months following the firms fiscal year end.
book value assets at fiscal year end.
book value liabilities at fiscal year end.
abnormal earnings, computed as income before extraordinary items (Compustat Data 18) less expected return
(12% (following Bell, et al. 2002) * book value of equity at previous fiscal year end).
REC_LEASE = liability recorded as a result of consolidating the lessor VIE.
DISC_LEASE = the present value of the disclosed future minimum lease payments (Compustat Data 95 + Data 389),
assuming the life of the lease can be determined by dividing the total of the minimum lease payments by the
average payment as determined by Data 95/5, the incremental borrowing rate is 10% (following Ely, 1995)
and the estimated total life of the lease is equal to total minimum payments divided by the average payment.
MAX_RISK = disclosed maximum risk exposure related to significant VIEs in which the firm is not the primary beneficiary.
25
Table 3
Correlation Analysis
Pearson Correlation Coefficients
(p-values)
MVE
MVE
BVA
nBVL
AEARN
BETA
REC_LEASE
DISC_LEASE
MAX_RISK
BVA
nBVL
AEARN
BETA
REC_LEASE
DISC_LEASE
1.000
.6696
(.0000)
.5338
(.0000)
.9667
(.0000)
1.000
-.0009
(.9847)
-.1569
(.0004)
.1880
(.0000)
.1716
(.0001)
-.0472
(.2883)
-.0373
(.4014)
.1539
(.0005)
.3899
(.0000)
-.0302
(.4969)
-.0102
(.8194)
.0590
(.1841)
.4015
(.0000)
-.0128
(.7729)
-.0166
(.7082)
-.0360
(.4186)
-.0182
(.6821)
.1617
(.0003)
.0529
(.2338)
1.000
-.0264
(.5525)
.0897
(.0433)
.1158
(.0090)
.0143
(.7480)
.1640
(.0002)
-.0081
(.8561)
.5983
(.0000)
MAX_RISK
1.000
1.000
1.000
1.000
1.000
__________________________
MVE
BVA
nBVL
AEARN
=
=
=
=
BETA
=
REC_LEASE =
DISC_LEASE =
MAX_RISK
=
per share price three months following the firms fiscal year end.
book value assets at fiscal year end.
total liabilities less consolidated lease VIE liability, divided by shares outstanding at fiscal year-end.
abnormal earnings, computed as income before extraordinary items (Compustat Data 18) less expected return (12% (following Bell, et al. 2002) * book value
of equity at previous fiscal year end).
12-month BETA for 2002 and 2003, estimated using the market model. Beta is incorporated to control for the impact that risk is expected to have on the
market’s evaluation of additional obligations.
liability recorded as a result of consolidating the lessor VIE.
the present value of the disclosed future minimum lease payments (Compustat Data 95 + Data 389), assuming the life of the lease can be determined by
dividing the total of the minimum lease payments by the average payment as determined by Data 95/5, the incremental borrowing rate is 10% (following Ely,
1995) and the estimated total life of the lease is equal to total minimum payments divided by the average payment.
disclosed maximum risk exposure related to significant VIEs in which the firm is not the primary beneficiary.
26
Table 4
Model 1
MVEit  1CONSTANT   2 BVAit   3 nBVLit   4 BETAit   5 AEARN it   6 NEGAEARN
  7 MULTIPLE   8 REC _ LEASEit   9 DISC _ LEASEit   it
2002
CONSTANT
-14.54
(-1.41)
-20.44*
(-2.01)
-15.32
(-1.21)
BVA
0.61**
(13.61)
0.60**
(13.84)
1.00**
(18.32)
nBVL
-0.58**
(-10.19)
-0.57**
(-10.23)
BETA
2.51**
(4.90)
AEARN
Estimate
(p-value)
2003
-23.12
(-1.89)
Pooled
-15.46
(-1.83)
-22.60**
(-2.72)
0.99**
(18.84)
0.80**
(21.79)
0.79**
(22.27)
-1.02**
(-14.74)
-1.01**
(-15.08)
-0.79**
(-16.99)
-0.78**
(-17.22)
2.29**
(4.53)
3.45**
(6.66)
3.10**
(6.15)
3.09**
(8.15)
2.79**
(7.52)
4.68**
(6.73)
4.40**
(6.45)
2.76**
(4.70)
2.64**
(4.67)
3.03**
(6.73)
2.85**
(6.53)
-4.76**
(-6.80)
-4.48**
(-6.54)
-2.81**
(-4.76)
-2.70**
(-4.75)
-3.09
(-6.83)
-2.92**
(-6.64)
MULTIPLE
11.26**
(3.41)
11.98**
(3.77)
12.12**
(4.12)
12.69**
(4.45)
REC_LEASE
-1.05**
(-5.04)
-.99**
(-4.92)
-0.61**
(-3.31)
-0.56**
(-3.13)
-0.30**
(-3.32)
-0.31**
(-4.05)
-.14*
(-2.43)
-.16**
(-2.79)
254
.8071
2.51**
(4.05)
254
.8120
508
.7571
2.47**
(5.83)
508
.7726
NEGAEARN
DISC_LEASE
-.01
(-0.17)
-.03
(-.45)
254
.7252
1.93**
(3.66)
254
.7398
DISC_LEASE*MATCH
n
R-Squared
27
________________________
CONSTANT
BVA
nBVL
BETA
=
=
=
=
AEARN
=
NEGAEARN
MULTIPLE
REC_LEASE
=
=
=
DISC_LEASE
=
DISC_LEASE*
MATCH
=
1/shares outstanding at fiscal year-end (following Bell, et al., 2002)
total assets divided by shares outstanding at fiscal year-end.
total liabilities less consolidated lease VIE liability, divided by shares outstanding at fiscal year-end
12-month BETA for 2002 and 2003, estimated using the market model. Beta is incorporated to control for the impact that risk is expected to have on the
market’s evaluation of additional obligations.
abnormal earnings computed as income before extraordinary items less expected earnings (prior year’s book value * .12) (following Bell et al., 2002),
divided by shares outstanding at fiscal year-end.
abnormal earnings, if negative, divided by shares outstanding at fiscal year-end.
1 if the firm disclosed more than one VIE in the context of the FIN 46 adoption.
lease liability recognized on the balance sheet, either by consolidation of the VIE or purchase of the leased asset, as disclosed in the “new pronouncements”
footnote. Divided by shares outstanding at fiscal year-end.
the present value of the disclosed future minimum lease payments
(Compustat Data 95+ Data 389), assuming the life of the lease can be determined by dividing the total of the minimum lease payments by the average
payment as determined by Data95/5, the incremental borrowing rate is 10% (following Ely, 1995), and the estimated total life of the lease is equal to total
minimum payments divided by the average payment. Divided by shares outstanding at fiscal year-end.
Interaction between DISC_LEASE and MATCH where MATCH = 1 if the firm is from either of the matched samples (NME and GEN) and
0 if the firm is part of the VIE sample.
28
Table 5
Model 2
MVEit  1CONSTANT   2 BVAit   3 nBVLit   4 BETAit   5 AEARN it   6 NEGEARNit
  7 MULTIPLE   8 REC _ LEASEit   9 DISC _ LEASEit  10 ACTION it  11 ACTION 2 it   it
Estimate
(p-value)
CONSTANT
-4.43
(-0.37)
0.96**
(18.28)
-0.98**
(-14.76)
2.41**
(4.61)
2.19**
(3.87)
-2.20**
(-3.87)
4.94
(1.46)
BVA
nBVL
BETA
AEARN
NEGAEARN
MULTIPLE
REC_LEASE
-1.16**
(-5.81)
-0.31**
(-3.61)
10.78**
(4.44)
12.26**
(4.29)
254
.8293
DISC_LEASE
COMPLY
NOCOMPLY
n
R-squared
_____________________________
CONSTANT
BVA
nBVL
BETA
=
=
=
=
AEARN
=
NEGAEARN
MULTIPLE
REC_LEASE
=
=
=
DISC_LEASE
=
COMPLY
NOCOMPLY
=
=
1/shares outstanding at fiscal year-end (following Bell, et al., 2002)
total assets divided by shares outstanding at fiscal year-end.
total liabilities less consolidated lease VIE liability, divided by shares outstanding at fiscal year-end
12-month BETA for 2002 and 2003, estimated using the market model. Beta is incorporated to control
for the impact that risk is expected to have on the market’s evaluation of additional obligations.
abnormal earnings computed as income before extraordinary items less expected earnings (prior year’s
book value * .12) (following Bell et al., 2002), divided by shares outstanding at fiscal year-end.
abnormal earnings, if negative, divided by shares outstanding at fiscal year-end.
1 if the firm disclosed more than one VIE in the context of the FIN 46 adoption.
lease liability recognized on the balance sheet, either by consolidation of the VIE or purchase of the
leased asset, as disclosed in the “new pronouncements” footnote. Divided by shares outstanding at fiscal
year-end.
the present value of the disclosed future minimum lease payments
(Compustat Data 95+ Data 389), assuming the life of the lease can be determined by dividing the total of
the minimum lease payments by the average payment as determined by Data95/5, the incremental
borrowing rate is 10% (following Ely, 1995), and the estimated total life of the lease is equal to total
minimum payments divided by the average payment. Divided by shares outstanding at fiscal year-end.
1 if the firm consolidated or disclosed the VIE and 0 otherwise.
1 if the firm restructured, purchased, consolidated the purchased, or terminated the VIE.
29
Table 6
Model 3
MVEit  1CONSTANT   2 BVAit   3 BVLit   4 BETAit   5 AEARN it   6 NEGAEARNit
 7 MULTIPLEit   8 MAX _ RISK it   it
Estimate
(p-value)
CONSTANT
BVA
BVL
BETA
AEARN
NEGAEARN
MULTIPLE
MAX_RISK
Original
Model
-16.19
(-1.28)
0.97**
(17.83)
-0.99**
(-14.28)
3.31**
(6.43)
2.43**
(4.25)
-2.48**
(-4.31)
11.95**
(3.59)
-0.21**
(-2.70)
DISC_LEASE
n
R-squared
254
.8043
Expanded
Model
-15.11
(-1.20)
1.02**
(17.14)
-1.04**
(-14.30)
3.48**
(6.71)
2.88**
(4.73)
-2.94**
(-4.80)
10.74**
(3.20)
0.14
(0.76)
-0.44*
(-2.08)
244
.8076
_____________________________
CONSTANT
BVA
nBVL
BETA
=
=
=
=
AEARN
=
NEGAEARN
MULTIPLE
MAX_RISK
=
=
=
DISC_LEASE
=
1/shares outstanding at fiscal year-end (following Bell, et al., 2002)
total assets divided by shares outstanding at fiscal year-end.
total liabilities less consolidated lease VIE liability, divided by shares outstanding at fiscal year-end
12-month BETA for 2002 and 2003, estimated using the market model. Beta is incorporated to control
for the impact that risk is expected to have on the market’s evaluation of additional obligations.
abnormal earnings computed as income before extraordinary items less expected earnings (prior year’s
book value * .12) (following Bell et al., 2002), divided by shares outstanding at fiscal year-end.
abnormal earnings, if negative, divided by shares outstanding at fiscal year-end.
1 if the firm disclosed more than one VIE in the context of the FIN 46 adoption.
For firms with significant, but not primary interest in the lessor VIE, the maximum exposure to risk
disclosed in the notes to the financial statements.
the present value of the disclosed future minimum lease payments
(Compustat Data 95+ Data 389), assuming the life of the lease can be determined by dividing the total of
the minimum lease payments by the average payment as determined by Data95/5, the incremental
borrowing rate is 10% (following Ely, 1995), and the estimated total life of the lease is equal to total
minimum payments divided by the average payment. Divided by shares outstanding at fiscal year-end.
30
Figure 1
Typical Synthetic Lease Structure
Adapted from Little (2002)
Third Party Seller
Title
Purchase
Price
Loan
Proceeds
Loan
Lender
Lessee
(Company)
Lessor (SPE)
Debt
Service
Rent
Return
Equity
Equity Participant
31
Figure 2
Pre-/Post-VIE Treatment in the Sponsor’s Financial Statements
and Notes to the Financial Statements
Panel A: Pre-FIN 46
Sub-Sample Partition
Accounting Treatment
Consolidated the VIE lessor under the provisions
of FIN 46
Disclosed a significant interest in a VIE lessor
Bought the lease or otherwise purchased the
property underlying the lease/ Consolidated the
VIE lessor and subsequently purchased the
-Rent expense reported on the income statement.
associated property
-Future minimum operating lease payments
Terminated the lease
disclosed in the notes to the financial statements.
Restructured the lease so that it would qualify as
an operating lease
Disclosed no effect from FIN 46 on the treatment
of the lease
Matched sample
Panel B: Post-FIN 46
Sub-Sample Partition
Accounting Treatment
Consolidated the VIE lessor under the provisions
-Assets and liabilities of the VIE consolidated onto
of FIN 46
the balance sheet.
-Depreciation and interest expense reported on the
income statement.
-Details of the relationship with the VIE and the
VIE’s financing structure disclosed in the notes to
the financial statements.
Disclosed a significant interest in a VIE lessor
-Rent expense reported on the income statement.
-Future minimum operating lease payments
disclosed in the notes to the financial statements.
-Details of the relationship with the VIE and the
VIE’s financing structure disclosed in the notes to
the financial statements.
-The maximum exposure to loss as a result of
involvement with the VIE disclosed in the notes to
the financial statements.
Bought the lease or otherwise purchased the
-Formerly leased asset (and any associated debt)
property underlying the lease/ Consolidated the
appears as an ordinary asset and liability on the
VIE lessor and subsequently purchased the
balance sheet.
associated property
-Depreciation and any interest expense reported on
the income statement.
Terminated the lease
-Formerly leased asset no longer appears in the
financial statements or notes.
Restructured the lease so that it would qualify as
an operating lease
-Rent expense reported on the income statement.
Disclosed no effect from FIN 46 on the treatment
-Future minimum operating lease payments
of the lease
disclosed in the notes to the financial statements.
Matched sample
32
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