The Impact of IFRS 16 on Key Financial Ratios: A New Methodological Approach

Abstract

In January 2016, the International Accounting Standards Board issued a new standard for lease accounting: International Financial Reporting Starndard (IFRS) 16. IFRS 16 will lead to the capitalisation of the majority of current operating leases by lessees. We analyse the impact of the new accounting model on entity’s key financial, contributing to research by making significant changes in the Imhoff et al. [(1991). Operating leases: Impact of constructive capitalization. Accounting Horizons, 5(1), 51–63. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=9604010111&site=ehost-live; (1997). Operating leases: Income effects of constructive capitalization. Accounting Horizons, 11(2), 12–32. Retrieved from http://0-search.proquest.com.fama.us.es/docview/208896121?accountid=14744] methodology used by previous authors. We change how the lease term is estimated (more aligned with the final approved standard), and how the discount rate is obtained. Furthermore, we use a more comprehensive sample (646 quoted European companies). In line with previous research we find important systematic impacts on key balance sheet financial ratios (mainly leverage ratios), on a magnitude that depends on the operating lease intensity of the sector in which the entity operates. Our estimated impact is generally higher than that obtained in previous studies. The most affected sectors are retail, hotels and transportation. We do not find a consistent result with regard to the effect on profitability ratios.

Keywords:

• IFRS 16
• lease accounting
• financial ratios
• impact assessment

JEL Classification:

• M41

Acknowledgements

We are grateful to prof. Paul André and anonymous reviewers for their helpful comments and suggestions.

Disclosure Statement

No potential conflict of interest was reported by the authors.

ORCID

José Morales-Díaz http://orcid.org/0000-0001-7234-7212

Constancio Zamora-Ramírez http://orcid.org/0000-0002-6478-6941

Supplementary material

Supplemental data for this article can be accessed here https://doi.org/10.6084/m9.figshare.845654?noredirect

Notes

1 There are also several literature reviews about lease accounting topic (Barone et al., 2014; Beattie, Goodacre, & Thomson, 2000; Goodacre, 2003; Morais, 2011; Spencer & Webb, 2015).

2 The FASB also issued a first draft in 2010 and a revised draft in 2013, as this has been a joint project. Before issuing the Exposure Drafts they issued a Discussion Paper in 2009 (‘Leases. Preliminary Views’).

3 There were 760 letters responding to 2010 ED and 640 letters responding to 2013 ED, issued by: companies, other standards issuers, governments, professional bodies, academics, individuals, etc.

4 Euro is the functional currency of the majority of the companies in the sample but not the functional currency of all the companies. Nevertheless, in current economic context, all European free risk rates are similar and very low.

Additional information

Funding

This work was supported by Consejería de Economía, Innovación, Ciencia y Empleo, Junta de Andalucía : [Incentivo al grupo de investigación SEJ-400]; Universidad de Sevilla [Dpto. Contabilidad y Economía Financiera].