Capitalisation of operating lease and its impact on firm’s financial ratios: Evidence from Italian listed companies

Abstract

Lease accounting will never be the same again. The endorsement of IFRS 16 on November 2017 sets out new rules for the recognition and measurement of the lease. The new standard removes the lessee’s distinction between operating and financial lease and it will have a substantial impact for companies have previously kept a large proportion of their financing off balance sheets. Under IAS 17 companies have exploited a financial accounting loophole by structuring lease transactions as operating leases, favouring opportunistic behaviours by managers and distorting the investors’ perception of the disclosure. IFRS 16 removes the so-called bright lines companies used to avoid capitalisation of leases and turns any attempt to hide lease liabilities off the balance sheet into a futile exercise to improve transparency of information. The purpose of this research is to analyse the potential impact of the new accounting rules on key financial ratios of Italian listed companies using a refined constructive capitalisation method. The results of the study show that the reflection of the operating leases on the balance sheet shall cause a significant increase in the assets and liabilities and for this reason, there shall be a significant effect on the main debt, liquidity and profitability ratios.

Exploring sustainable governance: Compliance with the Italian related party transactions regulation for the legal protection of minority shareholders

“…Finally, we have determined that the presence of independent and non‐executive directors is associated with the adoption of stricter internal codes, assuring the adoption of an effective compliance system that contributes to enforcing a good and sustainable governance model in light of existing contributions (Aghion et al, ; Amini et al, ; Hahn et al, ; Hahn & Scheermesser, ; Maglio et al, ; Lombardi, ; Lozano, ; Welford, ). Therefore, these results show that the presence of adequate enforcement mechanisms—issued by policymakers such as Consob and Borsa Italiana—may be necessary for a more efficient development of the protection for minority shareholders and of a sustainable corporate governance system.…”

“…Although major corporate governance discussions started from the separation of ownership and control in organizations (Berle & Means, 1932;Jensen & Meckling, 1976), several growing issues involve good corporate governance systems such as legislation, codes of best practices adoption, relevance of stakeholders and shareholders and their protection, identification of the role of responsibility of the board and management (Lombardi, 2012;Maglio, Rapone, & Rey 2018;Trequattrini, 1999), and corporate social responsibility (Welford, 2007). In Italy, the capitalistic model is mostly composed of small and medium enterprises (SMEs) that usually retain the features of the family business, and the owner is generally the manager of the company (Lombardi, Trequattrini, & Russo, 2016;Maglio, Petraglia, & Agliata, 2018).…”

Operating lease decision among east Asian firms; critical factors for sustainable development

“…Maglio, Rapone, and Rey (2018) analyzed the changes of the Italian regulation of removing the distinction between operating lease and financial lease. The result revealed that the reflection of operating lease on the balance sheet shall cause an increase in assets and liabilities and for this reason, there shall be an effect on debt, liquidity, and profitability ratios.…”

Lease accounting

“…Companies generally appear to maintain a higher debt level and lower profitability. The most recent studies are those by Singh (2012), Fitó et al (2013), Wong and Joshi (2015), You (2017), Morales-Díaz and Zamora-Ramírez (2018b), Magli et al (2018), , , Maali (2018), and Maglio et al (2018).…”

“…Within the IFRS (International Financial Reporting Standards) context, IFRS 16 has replaced IAS (International Accounting Standard) 17 for reporting periods beginning on or after 1 January 2019. Under US GAAP 1 , ASC 2 Topic 842 has replaced former Topic 840 with a similar initial application date.…”