Module 9. Reporting and Analyzing Off-Balance Sheet Financing. Why is Off-Balance Sheet Financing Important?.
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Reporting and Analyzing Off-Balance Sheet Financing
GAAP identifies for two different approaches in the reporting of leases by the lessee:
3. For the early years of the lease term, rent expense reported for an operating lease is less than the depreciation and interest expense reported for a capital lease. This means that net income is higher for those years with an operating lease. Further, if the company is growing and adding operating leased assets at a high rate, the rent expense could always be less than first year depreciation and interest on capital leases, and the level of net profits would be permanently increased.
4. Without analytical adjustments, the portion of ROE derived from operating activities (RNOA) appears higher, and the company’s ROE is perceived of higher quality.
Failure to recognize lease assets and liabilities when they should be capitalized yields distortions in ROE disaggregation analysis (in Module 4) — specifically: