The warehouse capital management policy – Treatment of leases

•This case requires the constructive capitalisation of an operating lease.•The case is set in the context of the IASB lease accounting project.•Common financial ratios are used to measure the impact of capitalisation.•The economic consequences of lease capitalisation are considered through the firm's capital management policy and sale and leaseback decision.

This case requires the use of financial statement footnote data to constructively capitalise operating leases. This is important because the joint FASB/IASB project has a proposal to capitalise most leases that are currently off-balance sheet. The impact of lease capitalisation is assessed by calculating common financial statement ratios and comparing the results to a lease multiple. Multiples are a rule-of-thumb method of estimating lease capitalisation. But are they accurate? The economic consequences of lease capitalisation are investigated. First, the impact on the firm's capital management policy is assessed. This includes the impact on accounting ratios that are required to be maintained by the firm's debt contract. Second, the impact touches on a potential ‘sale and leaseback’ business decision.