Conceptually, why does capitalisaing a lease enhance earnings quality, and an operating lease lowers earnings quality?
Financing leases are more conservative: higher expenses in the early years. so lower current income, higher future income.
Operating leases are more aggressive: lower expenses in the early years, so higher current income, lower future income.
More conservative implies higher quality.
thanks
You’re welcome.
Sorry guys confuse here. I’m reading up on the beneish model and apparently this statement is incorrect. “Increase in asset quality index indictae that the revenue recognition policies are conservative”. Why is this wrong? When aqi increases that means ur capitalising too many expenses. Ias per above comments that means you’re increasin expenses in the short term and reducing met income which is conservative right? Not getting this.
This is from schweser q bank btw.
Ok I think I know why. Because this is talking abt it from the lessor point of view. I.e. recognising capital leases means it’s a cash inflow from the lessor point of view when you sell the asset. And u get higher interest plus principal payments I’m the beginning of the period