The Impact of Lessee and Lessor Accounting in Local Councils

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.