What lies behind compliance with operating leases disclosure?

ABSTRACT

Compliance is one of the big challenges in the International Financial Reporting Standard (IFRS) implementation process. Additionally, the current debate on the operating leases accounting treatment is more in force than ever due to the recent support shown by the European Commission to companies lobbying against the proposal. In this article, we analyse and compare the level and evolution of compliance of UK and Spanish companies regarding mandated operating lease disclosures for the period of 2005–2011. Additionally, we look for determinants of compliance. Our results show a significant higher level of disclosure for UK compared with Spain and a positive trend in both countries towards full compliance. As for the determinants of compliance, media coverage and industry are found to be significant. The transparency needed in the markets demands high quality financial reporting and compliance commitment and, in this sense, we seem to be on the right track.

RESUMEN

Uno de los principales retos del proceso de implantación de las IFRS es su cumplimiento por parte de las empresas. Adicionalmente, el debate actual sobre el tratamiento contable de los arrendamientos operativos está ahora mas vigente que nunca con la proxima entrada en vigor de la norma y por el soporte mostrado por la Unión Europea a las compañías que argumentan en contra. En este artículo analizamos y comparamos el nivel y evolución de cumplimiento con los requerimientos de desglose de información requeridos en relación a los arrendamientos operativos para una muestra de empresas británicas y españolas y para el periodo 2005-2011. Adicionalmente, analizamos cuales pueden ser los determinantes de dicho cumplimiento. Nuestros resultados nos muestran un nivel de cumplimiento superior en las empresas británicas respecto a las españolas mostrando ambos paises una tendencia positiva. En cuanto a los determinantes, el nivel de cobertura mediática y el sector son significativos. La transparencia requerida a los mercados demanda información financiera de calidad y compromiso con el cumplimiento y, en ese sentido, parece que vamos en la buena dirección.

KEYWORDS:

• Compliance
• disclosure
• IFRS
• operating leases
• media coverage

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. The IASB issued the new IFRS 16 Leases in January 2016 although it will not come into force until 1 January 2019. In this study we will use International Financial Reporting Standards (IFRS) when referring to the general body of International Accounting Standards (prior and after 2001) while we will use IAS (International Accounting Standards) when specifically referring to those prior to 2001.

2. Arguments supporting and detracting from the IASB proposal for operating leases have been collected from an analysis of comment letters.

(http://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage%26cid=1218220137090%26project_id=2013-270) sent to the IASB and the FASB, mainly from companies and auditors.

3. Under IAS 17 (IASB, 2003), companies were required to disclose future payments derived from current operating lease contracts that are due in 1, 2–5, and more than 5 years.

4. Regarding the discount rate, users face an additional difficulty derived from the fact that it is an estimated variable (http://www.wsj.com/articles/SB109580870299124246).

5. It is not the objective of our paper to analyse the second assumption of user capability. This requires definition of the term ‘users.’ If, following the IASB Conceptual Framework (IASB, 2010), users of financial statements are current and potential investors and lenders, then the assumption can be accepted. However, if we consider that the users of financial information extend beyond these two groups, then the assumption of user capability should be reconsidered.

6. www.cnmv.es.

7. In Spain, future payments derived from operating lease contracts have only been mandatory since 2005 for consolidated financial statements and 2008 for separate statements. The Spanish Government issued the first mandatory accounting standards in 1990 as a response to the Fourth Directive. However, in that body of regulation, no disclosure was required for operating leases. In 2005, and because of IFRS mandated implementation in Europe, those disclosures become mandatory only for consolidated accounts. In 2008, the Spanish government issued new Spanish GAAP (Plan General de Contabilidad) and operating lease disclosures became mandatory for separate financial statements.

8. Rutherford (2007) refers to an explosion of the lease activity in the UK between 1973 and 1983 and the steps that led to the issuance of the SSAP21 in 1984.

9. http://www.leaseurope.org/uploads/documents/FF%20Leaseurope%202012.pdf.

10. All the information regarding the process together with the full list of the companies is available should any reader be interested. UK firms have not been contacted and this may potentially incorporate doubts into the analysis, as it is unclear whether a similar percentage of UK firms behave as Spanish firms.

11. We also followed the methodology of Zhi Da, Engelberg, and Gao (2011) to measure media coverage. They propose a new and direct measure of investor attention using search frequency in Google Trends (Google Trends provides data on search term frequency dating back to January 2004), however, the results were unsatisfactory. Although a search engine user may search for a stock in Google using either its ticker or company name, the authors considered that searching for a stock using its ticker was less ambiguous. Nevertheless, in our sample, using the ticker, we examined the most common queries, eliminating all the tickers clearly affected by subjectivity, because they have multiple or generic meanings. After this process, over 70% of the sample was excluded. (Zhi Da et al., reject approximately 50% of the observations). In the majority of cases, when the full company name was used the search volume provided insufficient results. Furthermore we considered that in the current version of Google Trends, the search volume index represents weekly interest relative to the highest point on the chart and does not show absolute search volume, which would be more useful for our study.

Additional information

Funding

This study has received financial support from the Spanish Department of Science and Technology (Plan Nacional de Investigación Científica, Desarrollo e Innovación Tecnológica 2010-2013, Programa de Ciencias Sociales, Económicas y Jurídicas (Economía), (code: ECO 2010-18967).