Effects of IFRS 16 on Key Financial Ratios of Spanish Companies

Ramírez, Constancio Zamora; Díaz, José Morales

doi:10.25115/eea.v36i2.2536

Cited by 14 publications

(14 citation statements)

References 12 publications

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“…The post-issuance study by Yu [38], which was conducted on Air China's financial statements, showed that total liabilities, total assets, the debt to asset ratio and EBITDA increased and the asset turnover ratio decreased. Morales-Diaz and Zamora-Ramirez [39] showed the significant impact of IFRS 16 Leases on the financial statements of Spanish companies that were even higher than previously anticipated. Morales-Diaz & Zamora-Ramirez [40] confirmed their previous findings.…”

Section: Theoretical Backgroundmentioning

confidence: 80%

“…Morales-Diaz & Zamora-Ramirez [40] confirmed their previous findings. Researchers generally agree that the introduction of IFRS 16 Leases should do the following: (a) increase the reported values of assets and liabilities in the statement of financial position, (b) affect the statement of profit and loss, (c) lead to significant changes in key financial ratios, especially leverage on assets, leverage on equity and profitability (e.g., return on assets) [37][38][39][40][41]. It is reasonable to expect that the magnitude and direction of the impact would depend on the industry, due to the value and structure of leased assets.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

“…It is reasonable to expect that the magnitude and direction of the impact would depend on the industry, due to the value and structure of leased assets. Researchers suggest that the most affected industries should be retail, airlines, media, hotels and the energy sector [34,39,40].…”

Section: Theoretical Backgroundmentioning

confidence: 99%

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The Impact of a New Accounting Standard on Assets, Liabilities and Leverage of Companies: Evidence from Energy Industry

2022

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The climate policy of the EU enforced substantial changes for producers and suppliers of energy. New assets and providers of capital are needed to fulfill the policy requirements. To provide comparability and facilitate an investment process, EU law requires companies to prepare annual financial statements according to International Financial Reporting Standards. One of these accounting standards—IFRS 16 Leases—specifies how to recognize, measure, present and disclose leases. It came into force in 2019 and implemented a single lessee accounting model, contrary to a dual accounting approach for lease accounting. The latter approach enabled companies to keep leased tangible assets and respective liabilities off-balance sheet. By using a sample of companies from the energy industry (oil, gas, energy and mining sectors) that are listed on the Warsaw Stock Exchange, we examine, measure, and analyze the impact of IFRS 16 Leases implementation on the value of assets, liabilities and leverage on assets and leverage on equity. The paper may serve as an insightful case study of how the implementation of a new standard influences the financial situation of the affected companies in the energy industry. Our paper contributes to the scientific debate in the following three ways: (1) we confirmed the influence of IFRS 16 Leases on assets, liabilities, leverage on assets and leverage on equity that was anticipated in the literature, (2) using the auditing methodology, we demonstrated the material changes of assets and liabilities in the energy industry, (3) based on the research results, we suggested recommendations for further scientific studies.

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Section: Theoretical Backgroundmentioning

confidence: 80%

Section: Theoretical Backgroundmentioning

confidence: 99%

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The Impact of a New Accounting Standard on Assets, Liabilities and Leverage of Companies: Evidence from Energy Industry

2022

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“…Leasing would even have higher debt capacity than secured lending because of easier repossession procedures. Morales-Díaz et al (2018b) adjusts interest rate curves for collateral by applying spread percentage changes of quoted CDS, determined as the change that would maintain the same probability of default, keeping sensitivity to basis point constant, when recovery rates are changed. However, Binfarè et al (2021) find that 20% of companies reporting under FASB (2021), FASB ASC Topic 842 has used lease discount rates that reflect unsecured debt.…”

Section: Literature Reviewmentioning

confidence: 99%

A Brand-New Method of Quantifying Lease Incremental Borrowing Rate under IFRS 16 and Topic 842

Bellandi¹

2021

IJBM

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One of the most contentious issues of lessee’s accounting under IFRS 16 and FASB ASC Topic 842 has been how to compute a lessee’s incremental borrowing rate (hereafter, IBR). A proper quantification of IBR is important because it affects the amount of a lessee’s right-of-use asset and lease liability recognized at lease commencement in the statement of financial position, as well as depreciation and interest expenses ongoing. Such a determination poses theoretical and practical difficulties to companies. This article develops a brand-new method that follows a conceptual approach that converge accounting and finance theory, to strike a balance between rigorous theory and practical application for companies. The proposed approach starts with a lessee’s actual average borrowing rate and compares it with its theoretical average borrowing rate based on synthetic rating. It then flexes the average rate along the interest term curve and derives the monthly rates applicable to each monthly cash flow. It adjusts the rates based on each specific lease features as defined in the standards, periodically updates the specific lease interest rate curves, and computes a lease IBR as the internal rate of return of the cash flows discounted at the monthly specific rates applicable to that specific lease. It finally compares with benchmarks. The proposed model is innovative because it is framed within, and consistent with, the definition of incremental borrowing rate in those accounting pronouncements, uses three starting references cross-checking each other, includes both an internal perspective of a company’s actual interest rates and an external market perspective, and is relatively easy to model in a partially automated spreadsheet application.

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“…Financial statements will be influenced by the changes of accounting treatment, because lessees need to recognize a right-of-use asset and corresponding liability in their statements of financial position, while lessees need to recognize the interest on the lease liability and the depreciation expense of the leased asset instead of the previous operating lease expenses. Furthermore, some important financial ratios such as debt to asset ratio, asset turnover ratio and EBITDA will also be affected [4,5]. Therefore, some industries such as retailers, airlines and telecommunications which are dependent on operating leases will face potential challenges [6][7][8].…”

Section: Introductionmentioning

confidence: 99%

Investigation of IFRS16 Effect on the Airlines

Yu¹

2019

JFA

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Under IAS17, operating leases can be reported in the notes of financial statements, so operating leases are not recognized in statements of financial position, and the lease payments are recognized as expenses and recorded in statements of profit and loss. Therefore, operating leases have the nature of off-balance sheet, and keeping operating leases off of the balance sheet has been the veil of the true nature of a company's liabilities. To increase the transparency of company's lease liabilities, IFRS 16 changes the way that lessees disclose operating leases in their financial statements. and relevant financial ratios including debt to asset ratio, asset turnover ratio and EBITD will also change. PwC, Deloitte, KPMG and Ernst & Young provide guides to help companies execute the new accounting standard, and they foresee that some industries will be influenced on the basis of the degree of dependence on operating leases. This paper will compare the accounting treatment of leases in IAS17 and IFRS16, and the impact on airlines will be analyzed from financial statements and financial ratios. For operating leases, the advantage of off-balance sheet will disappear, so Airlines that rely heavily on operating leases should consider the impact of lease capitalization on their businesses.

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Effects of IFRS 16 on Key Financial Ratios of Spanish Companies

Cited by 14 publications

References 12 publications

The Impact of a New Accounting Standard on Assets, Liabilities and Leverage of Companies: Evidence from Energy Industry

The Impact of a New Accounting Standard on Assets, Liabilities and Leverage of Companies: Evidence from Energy Industry

A Brand-New Method of Quantifying Lease Incremental Borrowing Rate under IFRS 16 and Topic 842

Investigation of IFRS16 Effect on the Airlines

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