A case of unwillingness to adopt an international accounting standard: lease accounting in Finnish municipalities

Abstract

Purpose – This case study aims to provide an illustrative example of the divergence of public sector accounting from international harmonising pressures. This is demonstrated by a specific financial statement presentation standard issued by the International Public Sector Accounting Standard Board (IPSASB) for leases, against which the national accounting regulator has deliberately issued a differing guideline for municipalities. Based on the evidence from our case context, we also assess whether a country’s unique practices might be more cost-effective than the lease standard while still satisfying users' informational needs. Design/methodology/approach – Our data consist of archival documents and financial statement information collected from all municipalities in the continental parts of Finland. We analyse the differences between financial ratios calculated using the case country’s own rules and those calculated by capitalising leases. Additionally, we have conducted interviews with key individuals from the national standard-setter and the association representing municipalities. Findings – Our case study supports the institutional theory perspective on the significance of entrenched accounting culture and the resulting resistance to institutional change in the face of accounting harmonisation pressures. Based on document and interview data, national financial statement regulation exhibits characteristics of both path-dependency and rational decision-making, related both to the cost-benefit considerations of financial statement presentation and, undoubtedly, to the self-interests of financial statement preparers. This connection to the positivist accounting theory does not contradict the institutional explanation but rather reinforces it. Research limitations/implications – The limitation of our quantitative data is that we only investigated the impact of leasing on financial ratios with two-year data from all Finnish continental municipalities. We did not research how leasing compared to bank loans has evolved in the long run and how the shift to calculating rental liabilities in addition to loans in the indicators of municipal financial crisis criteria has affected the municipalities regarding their financing decisions. Practical implications – We demonstrate that adopting a private sector-inspired accounting solution is not necessarily cost-effective compared to an internally developed solution. The comparability of municipal financial statements can be ensured with the annual report and key indicator data. Another contribution is questioning the European Union’s plan to adhere strictly to the IPSAS 43 lease standard in its planned standards. Social implications – The content of financial statements should primarily meet the needs of the information users. In our case country, there has been no dissatisfaction in the municipal sector regarding the current practice of presenting lease liabilities, nor have there been demands to transition to presenting leases according to private sector practices. Both the economic and social costs of externally imposed reforms seem to be higher than acceptable. Originality/value – Lease accounting in municipalities is a largely unresearched area. We have conducted a critical study that questions the often assumed effectiveness of private sector-inspired accounting rules in tax-financed public sector entities.