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The Impact of Lessee and Lessor Accounting in Local Councils

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  • Nafiz Fahad
  • Tom Scott

Abstract

This paper examines the impact of capitalising operating leases on the financial ratios for New Zealand councils (local government). It finds that required financial management and leverage ratios significantly worsen, but by an immaterial amount. In contrast, return on assets significantly increases by a material amount. This extends the constructive lease capitalisation literature to public benefit entities. This paper also discusses the role of councils as both lessees and lessors and that any change to lessor accounting for operating leases would have a greater impact on councils, although likely still immaterial. As a recent exposure draft suggests the convergence of International Public Sector Accounting Standard lease accounting with International Financial Reporting Standard 16, this paper provides timely evidence to standard‐setters.

Suggested Citation

  • Nafiz Fahad & Tom Scott, 2022. "The Impact of Lessee and Lessor Accounting in Local Councils," Australian Accounting Review, CPA Australia, vol. 32(3), pages 388-395, September.
    • Handle: RePEc:bla:ausact:v:32:y:2022:i:3:p:388-395
    DOI: 10.1111/auar.12363
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    References listed on IDEAS

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    1. Ely, Km, 1995. "Operating Lease Accounting And The Markets Assessment Of Equity Risk," Journal of Accounting Research, Wiley Blackwell, vol. 33(2), pages 397-415.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Sylvain Durocher, 2008. "Canadian Evidence on the Constructive Capitalization of Operating Leases," Accounting Perspectives, John Wiley & Sons, vol. 7(3), pages 227-256, August.
    9. 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.
    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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