Variable Leases Under ASC 842: Evidence on Properties and Consequences

Abstract

The new lease standard (ASC 842) allows firms to keep variable leases off-balance-sheet, in part based on the assumption that future expenses are difficult to estimate reliably. We show that variable-lease expenses are both prevalent and substantial, exhibiting persistence and predictability comparable to operating-lease expenses, while showing limited sensitivity to revenue changes. These patterns are consistent with variable-lease payments being based on stable drivers. Following ASC 842 adoption, firms report lower minimum operating lease commitments and higher variable-lease expenses, suggesting a substitution from operating to variable leases. Neither equity betas nor credit ratings reflect potential variable-lease liabilities. Conservative estimates show that recognition of variable-lease liabilities would increase debt by 7.1% on average. Our findings provide evidence on the properties of variable leases and the potential implications of keeping them off-balance-sheet.