The Effect of Capitalising Operating Leases On Charities

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.