Right-of-Use Assets

Accounting Standard Codification (ASC) Topic 842, which is effective since 2019, requires balance sheet recognition of operating lease obligations and right-of-use (ROU) assets. For many firms, the implementation of this standard resulted in a large increase in reported operating assets, thus impairing the time-series consistency of metrics that use operating assets. This paper shows that ROU assets can be estimated quite precisely using lease disclosure, which is available since the late 1970. Adding estimated ROU assets to reported operating assets for pre-ASC 842 observations substantially improves the ability of operating assets to explain cross-sectional and time-series variation in sales. These findings suggest that when conducting quant-type analysis and for academic research, using lease-adjusted proforma financial information is warranted. They also indicate that, by requiring the recognition of ROU assets, ASC 842 has improved the informativeness of reported assets about the sales-generating ability of the firm