Academic journal article Academy of Accounting and Financial Studies Journal

Lease Financial Statement Accounting Practices Types and Numbers for Hong Kong

Academic journal article Academy of Accounting and Financial Studies Journal

Lease Financial Statement Accounting Practices Types and Numbers for Hong Kong

Article excerpt


The purpose of this research study was to investigate existing lease disclosure practices for financial statements in Hong Kong. Part of the purpose of this project is descriptive. The study classified, summarized and analyzed the lease accounting practices for a sample of Hong Kong companies.

Annual reports for a year ending during 1996 were examined to gather information about the accounting practices for leases for financial reporting in Hong Kong. The fifty companies were selected in a systematic random selection process. The fifty companies selected represent approximately nine percent of all the companies traded on the Hong Kong Stock Exchange for 1996.

Some of the major conclusions from this study include the following:

1 Most Hong Kong companies are involved in lease transactions as either
lessees or lessors or both.

2 The dollars committed to lease transactions are significant.

3 The profit and loss effect is, also, significant.


International leasing markets are rapidly becoming a single global market. Salameh, General Manager for Hewlett Packard for Asia Pacific, Central and Eastern Europe, has recently stated that globalization of financing services is driven by natural globalization of accounts and partners (Salameh, 1997). Leasing activities have become "big" business. Leasing volume in the Asia Pacific area was approximately US $111 billion in 1995. Total worldwide activity exceeded US $409 billion in the same year. Four of the twenty-two largest leasing companies in the world were located in Asia in 1995. Orix Corporation in Asia was the third largest with leasing volume greater than US $8.9 billion. Leasing is one of the fastest growing segments of the US financial services industry. The US $147 billion in new capital leases written in 1995 was a significant 5.3% increase over the 1994 total (McConville, 1996).

Most large institutional users are not satisfied with the existing levels of general disclosures by multinational firms (Taylor, 1995). This study will examine the lease accounting practices including footnote disclosures in Hong Kong. The accounting treatment for leases can be considered part of the general issue, the controversial use of off-balance sheet activities. The flexibility allowed companies under the existing general rules for leases may allow different companies to treat similar events in different ways. This inconsistent treatment may make financial comparisons very difficult. For example, certain financial measures such as solvency and debt ratios may be effected. Some companies may interpret accounting events in such a manner that the events are not reflected on the company's balance sheet. In some cases, information about an event may be disclosed in a footnote depending on certain criteria. Related accounting areas including contingencies may be effected by the procedures for leases.

The treatment for leases has been particularly controversial. Some leases, if the lease meets certain rules, are classified as finance leases. In that case, an asset and liability would be included in the lessee's balance sheet. If the lease is classified as an operating lease instead of a finance lease, then only a lease or rental charge reduces the profit and loss and no balance sheet accounts are effected. Some Hong Kong companies disclose information about leases only in a footnote and, therefore, these transactions can be classified as off-balance sheet financing. A discussion paper, Accounting for a New Approach, has been published by the respective accounting standards board in Australia, Canada, New Zealand, the UK, US, and the IASC proposes that all finance leases and most, if not all, operating leases would qualify as assets and liabilities (McGregor, 1996).

In Hong Kong, different groups are concerned about lease accounting practices. Many companies have been involved as lessees in Hong Kong. …

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