Operating Lease Recognition and Credit Assessment by Banks

This study examines how the implementation of the new lease accounting standard (ASC 842) affects banks’ internal credit ratings for their clients. Leveraging ASC 842’s staggered implementation due to different fiscal year ends, we find that, contrary to the concern held by most managers, banks rate firms as less risky post-ASC 842. This improvement is stronger for firms with greater credit assessment uncertainty in the pre-period, more abnormal operating lease activities in the pre-period, and more operating lease-related information disclosed after adopting ASC 842. Overall, our results are consistent with the implementation of ASC 842 reducing firms’ credit risk perceived by banks. Answering the call by the FASB for more research on ASC 842 to inform its post-implementation review, our evidence suggests that ASC 842 achieved its intent of improving transparency about operating lease activities.