Right-of-Use Assets and the Prediction of Revenue

ASC 842, which requires balance sheet recognition of right-of-use (ROU) lease assets, resulted in a large increase in reported assets since 2019, thus impairing the time-series consistency of metrics that use assets (e.g., asset turnover). This paper shows that ROU assets can be estimated quite precisely using lease disclosure. Adding the estimated ROU asset for pre-ASC 842 observations substantially improves the ability of operating assets to explain sales. It also increases the ability of growth in operating assets to predict sales growth and explain analysts’ revenue growth forecasts. Similar results are obtained when examining the reported ROU asset (since 2019) instead of the estimated one. These findings indicate that (1) by requiring the recognition of ROU assets, ASC 842 has improved the informativeness of reported assets about the sales-generating ability of the firm; and (2) when using pre-ASC 842 information, adding an estimate of the ROU asset is warranted.