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The Effect of Capitalising Operating Leases On Charities

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  • Nafiz Fahad
  • Tom Scott

Abstract

This paper examines the effect of capitalising operating leases on the total liabilities to total assets and surplus to total asset ratios for a sample of New Zealand charities. It finds that both ratios have significantly increased post‐capitalisation and that expenditures change. This extends the constructive lease capitalisation literature to the not‐for‐profit sector. This paper also discusses the characteristics of charities’ operating leases and how they differ from the for‐profit sector. Overall, this paper provides timely evidence to standard setters, especially considering the current exposure draft converging International Public Sector Accounting Standard lease accounting with International Financial Reporting Standard 16 Leases.

Suggested Citation

  • Nafiz Fahad & Tom Scott, 2022. "The Effect of Capitalising Operating Leases On Charities," Australian Accounting Review, CPA Australia, vol. 32(1), pages 141-148, March.
    • Handle: RePEc:bla:ausact:v:32:y:2022:i:1:p:141-148
    DOI: 10.1111/auar.12356
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    References listed on IDEAS

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    1. Begoña Giner & Francisca Pardo, 2018. "The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16," Australian Accounting Review, CPA Australia, vol. 28(4), pages 496-511, December.
    2. Vivien Beattie & Alan Goodacre & Sarah Jane Thomson, 2006. "Corporate Financing Decisions: UK Survey Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1402-1434, November.
    3. Kusano, Masaki, 2018. "Effect of capitalizing operating leases on credit ratings: Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 45-56.
    4. Giner, Begoña & Merello, Paloma & Pardo, Francisca, 2019. "Assessing the impact of operating lease capitalization with dynamic Monte Carlo simulation," Journal of Business Research, Elsevier, vol. 101(C), pages 836-845.
    5. Sylvain Durocher, 2008. "Canadian Evidence on the Constructive Capitalization of Operating Leases," Accounting Perspectives, John Wiley & Sons, vol. 7(3), pages 227-256, August.
    6. Vivien Beattie & Alan Goodacre & Sarah Jane Thomson, 2006. "Corporate Financing Decisions: UK Survey Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9-10), pages 1402-1434.
    7. Ely, Km, 1995. "Operating Lease Accounting And The Markets Assessment Of Equity Risk," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 33(2), pages 397-415.
    8. Partha Sengupta & Zheng Wang, 2011. "Pricing of off‐balance sheet debt: how do bond market participants use the footnote disclosures on operating leases and postretirement benefit plans?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(3), pages 787-808, September.
    9. Elisabetta Barone & Jacqueline Birt & Soledad Moya, 2014. "Lease Accounting: A Review of Recent Literature," Accounting in Europe, Taylor & Francis Journals, vol. 11(1), pages 35-54, June.
    10. Vivien Beattie & Keith Edwards & Alan Goodacre, 1998. "The impact of constructive operating lease capitalisation on key accounting ratios," Accounting and Business Research, Taylor & Francis Journals, vol. 28(4), pages 233-254.
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