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Question-   IFRS 16 Effects Analysis



The IFRS 16 introduced important accounting modifications. For instance, accounting for operating leases changed from a complete absence of the recording of assets and Journal Pre-proof 4 liabilities to a capitalization model. This change was made by adopting a “right-of-use” model. In this way, the IASB accepted the requests which proposed that all leases should be recognized on the balance sheet (ASB, 1999). Tại sao lại nêu ra sự thay đổi này? Quan trọng nhất k?

Key change?



Why was it implied?

  • Listed companies around the world have around €3 trillion worth of leases, especially in sectors such as the airline industry, retail and shipping; under current accounting requirements, over 85% of these leases are labelled as operating leases and are not recorded on the balance sheet (Hoogervorst 2016).

  • The current accounting rules have been widely criticised mainly due to the rather fine line between the two types of leases; while economically both transactions are similar, they are accounted for in very different ways. The different accounting treatments made firms structure their leases to avoid them appearing on the balance sheet (Imhoff and Thomas 1988), and the trend has been growing over time (Duke et al. 2009; Beatty et al. 2010; Bryan et al. 2010; Dechow et al. 2011). Tìm thêm bài báo mới hơn, not consistence, tìm thêm ý support
  • The main difference is that IAS 17 lacks the bright-line tests associated with SFAS 13,1 which facilitate structuring leasing arrangements with the intent of narrowly avoiding capitalisation (Spencer and Webb 2015)
  • Based on their own analysis of a sample of annual reports, approximately 63% of all listed companies reported operating leases, while only 22% reported finance leases (SEC 2005)
  • Phân tích hiệu lực được công bố cùng với IFRS 16 cho biết trong số các công ty niêm yết trên thế giới, khoảng 3 nghìn tỷ USD cam kết thanh toán trong tương lai không được trình bày và ghi nhận trên Bảng cân đối kế toán theo chuẩn mực kế toán trước đây, tức là IAS-17.


  • Adoption of IFRS 16 will create a positive market reaction, which may be caused by a decrease in information asymmetry between investors and companies. (Mark Zwang)
  • In 2018 Morales-Diaz and Zamora-Ramirez inspect the impact of IFRS 16 on the key financial ratios.
  • (Francesca Magli, Alberto Nobolo, Matteo Ogliari) shows that IFRS 16 will have a significant impact on the financial statements of lessees in terms of both the financial position and economic performance in certain business sectors. This research estimates the impacts that the new standard could have on balance sheets and income statements. In particular, on balance sheets, there will be an increase in lease assets, an increase in financial liabilities and a decrease in equity; on income statements, there will be an increase in EBITDA and an increase in finance costs.
  • Because the payment during the period will remain the same, thus IFRS will not afect the sum of reported cash flows (IFRS, 2016)


  • Entities will have to accurately determine the impacts of the new standard and pay particular attention to the following aspects:
    · the impact on finance covenants;
    · communications with the market;
    · the impact on the cost of debt;
    · the impact on capital, financial and economic metrics;
    · the changes needed in the information systems in order to manage the new lease accounting in accordance with the new standard. (Francesca Magli1, Alberto Nobolo1, Matteo Ogliari)
  • (Morales-Díaz, José Zamora-Ramírez, 2017) To have a lower lease liability (if this is the entity’s objective in the implementation project), the entity should:

1) Separate non-lease components from lease components as much as possible. If non-lease components are not separated, lease payments are higher. In some cases, operational costs can outweigh the advantages of separating certain kinds of nonlease components.

2) Apply the model voluntary exceptions for short-term leases and leases of low-value assets. This would mean applying the capitalisation model for fewer lease operations and, therefore, having less lease liability.

3) Apply the model voluntary exceptions for leases of intangible assets. This would also mean applying the capitalisation model for fewer lease operations.

4) Justify a lease term as short as possible according to IFRS 16 requirements (assessing extension / termination options) and the entity’s business model. The shorter the lease term, the lower the lease payments and the lower the lease liability


 Impact of Covid-19

On 28 May 2020, the IASB issued amendments to IFRS 16, which provide relief for lessees in accounting for rent concessions granted as a direct consequence of COVID-19. The global pandemic has resulted in many different types of concessions being agreed between lessors and lessees, including rent deferrals, rent abatement/forgiveness and many other types of relief. The IASB decided to amend IFRS 16’s requirements for lessees to simplify the lessee accounting requirements for rent concessions.


In 2018 Morales-Diaz and Zamora-Ramirez inspect the impact of IFRS 16 on the key financial ratios. As mentioned above, IFRS 16 will lead to the capitalization of operating leases. hus, operating leases will not be recognized as expenses but as asset or liability which will have an impact on the balance sheet and profit and loss account.They examine the effect of the accounting standard change from IAS 17 to IFRS 16 on several financial ratios and find that this change has a significant impact on the balance sheet, leverage and solvency ratio but does not show significant evidence for profitability. In other words, their results show an increase in leverage and a decrease in solvency. Solvency is computed by the coverage ratio, which measures the firm’s ability to service its debt and control its financial obligations such as interest payments. The decrease in solvency is caused by the relatively higher increase in interest expense compared to EBITDA. They also suggest that the magnitude of the effect differs across sectors. Sectors with a higher ratio of operating lease expense divided by total liabilities, show a higher magnitude. This includes the following sectors: retail, transport, hotels, and software and services.


Within this scope, of our case by reflecting IFRS 16 on the statement of financial
position and the selected financial analysis ratios of Eastern Company S.A.E the
capitalization method developed by Imhoff 1991 has been applied in the
capitalization of the operating leases of the company and it has been detected that
there shall be an increase by 17.57% % in the liabilities of the company, a decrease
by 3.88% in the equity of the company and an increase by 8.99% in the total assets
of the company by the lease contract period 8 years and average interest rate 12%
and 50% of the lease life cycles of the assets have been consumed (
Abdalwahab Ashraf Othman
Abdullah Abdelsalam Mohamed
Marwan Gamal Ahmed 2018)


IASB used the Framework concepts to justify new lease accounting requirements, it also used an outside-the-Framework notion to justify a requirement. Second, accommodating constituents' demands, it introduced rules in IFRS 16 to mitigate their concerns relating to high implementation costs. Third, there are instances where the IASB did not apply appropriate concepts to justify lease accounting requirements. (Humayun Kabir; Asheq Rahman2018)


In the balance sheet, the impact will be on non-current or long-term assets and current and non-current liabilities. In the assets, the changes were only in the values introduction, being in the leasing account, which previously recognized only the monthly remaining values and in the current accounting will be released the total value of the goods. Consequently, the monthly depreciation amounts will increase, since it was formerly released monthly on the accumulated value of the remaining value, while in this new standard it will be calculated on the total value of the property, plant and equipment. In liabilities, current and noncurrent accounts receive the amount of the asset as well as financing and charges for monthly appropriation; each group covers the proportionality referring to its term, being it short or long. In the yearly profit and loss statement, changes occur in financial expenses and in amounts referring to monthly depreciation. In the old accounting, the value of the consideration (rent expense) was released monthly in the financial expenses group, now this group will be used for monthly appropriation of the finance charges of the financial lease Depreciation continues to be recognized in operating expenses on a monthly basis, however with the new form of accounting the value will increase due to the calculation being on the total value of the property, plant and equipment.

In accordance with this data, it is estimated that on average the indicator will increase by 54%, that is, companies will become more leveraged or indebted to their equity and this may, somehow, alter the investors' perception of risks over these companies after the implementation of IFRS 16 in 2019. The table below shows the impact of the standard on the Net debt on EBITDA indicator. From the sample analyzed, 29 companies or 72.5% did not estimate the impact on EBITDA.

For this analysis, it may be considered as debt, only any bank indebtedness accounted by the company in December 2018. Thus, the Net debt indicator on EBITDA will have an impact an average downward impact of 58% on companies that estimated the values. This indicator must be analyzed as the lower the better, so IFRS 16 will improve the leverage perception of financial analysts since increasing EBITDA, consequently, it increases the ability to have the bank debts paid.

The expense associated to the lease contracts, consisting in the amortization of the right of use and the finance cost, will differ between the reporting periods, depending on the period of the contract, the amortization of the right to use the asset, the payment deadlines. Though the total net cash flow will not be influenced, the statement of cash flows will show a higher operating cash flow, while the net cash flow generated by financing activities will decrease by the same amount. A change of the amounts disclosed in the financial statement will implicitly result in a change of the financial indicators determined based on these. Hence, the debt ratio, total assets turnover will decrease, while the profitability indicators EBITDA and EBIT will increase.

For example, one of the sectors for which the new standard will have the most noticeable influence is likely to be the retail sector, as it has a high volume of leased premises used to store stores. The PwC Global Rental Lease Study, published in February 2016, notes that retail stores will increase the median debt ratio by 98% (due to recognition of lease obligations), and the median EBITDA will increase by 41% (due to the exclusion of all rental costs). In a broader context, real estate rental for retail and commercial property rentals may have a number of common characteristics, such as the possibility of extending the lease and variable rental payments.


  • Tóm tắt các điểm chính
  • Future research (ngcuu gì, chưa ngcuu gì)

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