The Effects of ASC 842 on the Value and Risk Relevance of Operating Lease Liabilities

This paper examines whether and how ASC 842 affects the relevance of operating lease liabilities (OLL). We find that ASC 842 increases the value and risk relevance of OLL because of the required recognition of lease information that was previously only disclosed. Furthermore, consistent with both the differential reliability and information processing cost perspectives, our results indicate that disclosed OLL is less value relevant for firms with less reliable OLL and higher information processing costs. Such firms experience a more pronounced increase in OLL’s value relevance after ASC 842. The effect of ASC 842 on OLL’s risk relevance appears to be driven by the differential reliability view: the increase in risk relevance is more pronounced for firms with less reliable OLL, but not affected by information processing costs. Overall, our results highlight the important roles that information reliability and processing costs play in determining the relevance of disclosed versus recognized OLL. These findings lend support to the standard setters’ view that ASC 842 should enhance OLL’s relevance and decision usefulness.