The Effects on Financial Leverage and Performance: The IFRS 16

Abstract

This paper analyses the potential impacts of the introduction of a new accounting standard, International Financial Reporting Standard 16 (IFRS 16) -Leases, on financial leverage and performance of entities. This new accounting standard was introduced on 13 January 2016, and will become effective on 1 January 2019; it will have material impacts on the financial statements of listed companies adopting IFRS and change the basic principles of the current accounting system. Our aim is to estimate the impacts of the application of IFRS 16 on listed issuers of financial statements and the different impacts that the new standard could have in different activity sectors. This research estimates the effects of IFRS 16 on the ratios of debt/total assets, EBITDA/revenues and debt/equity. The conclusions summarize the effects on entity performance and net financial position. The research shows that in the financial statements of the lessee, there will be important changes. In particular, in the balance sheet, there will be an increase in lease assets, an increase in financial liabilities and a decrease in equity, while in the income statement, there will be an increase in EBITDA and an increase in finance costs. The impact of the application of IFRS 16 will be different depending on the use of operating lease contracts among the different business sectors. Leases are an important and flexible source of financing; listed companies, using IFRS and U.S. GAAP, are estimated to have around US$ 3.3 trillion in lease commitments. Finally, this study aims to analyse the possible impacts of communication of entities, focusing on alternative performance measures.

IFRS 16 - Impact on the Assets of the Major Airlines Operating in Brazil

“…One of the purposes of IFRS 16 is to distinguish what is a lease and what is a service contract, this distinction is based on the customer's ability to control the asset being leased. A contract is, or contains, a lease if the contract provides a customer with the right to control the use of the identified asset for a period of time in exchange for consideration (Magli, Nobolo, & Ogliari, 2018).…”

“…Therefore, the lease liability is accounted for using the effective interest rate method. Where lease payments are prorated between interest expense and a reduction of the lease obligation using the effective interest method (Maali, 2018;Magli, Nobolo, & Ogliari, 2018).…”

“…As this type of operation was not accounted in the financial position, but only in income when the expenses were incurred, companies that used this form of financing had no precise information regarding the assets and the liabilities assumed. Another new feature of the new standard is the introduction of criteria based on control for assets (right of use) to distinguish a lease from a service contract (Magli, Nobolo, & Ogliari, 2018).…”

Factors driving indebtedness among small- and medium-sized dairy companies

“…Indeed, the improvement in profitability decreases in the proportion of debt (Rahayu et al , 2018). The capability of a firm in repaying financial debts through the amount of financial resources generated by its core business is a relevant information (Magli et al , 2018). In addition, EBITDA is an acceptable approximation of financial resources generated by a firm through its operating activity, which is helpful for financial debt repayments.…”

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).…”