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The Effects on Financial Leverage and Performance: The IFRS 16

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  • Francesca Magli
  • Alberto Nobolo
  • Matteo Ogliari

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.

Suggested Citation

  • Francesca Magli & Alberto Nobolo & Matteo Ogliari, 2018. "The Effects on Financial Leverage and Performance: The IFRS 16," International Business Research, Canadian Center of Science and Education, vol. 11(8), pages 76-89, August.
    • Handle: RePEc:ibn:ibrjnl:v:11:y:2018:i:8:p:76-89
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    References listed on IDEAS

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    1. Ray Ball, 2006. "International Financial Reporting Standards (IFRS): pros and cons for investors," Accounting and Business Research, Taylor & Francis Journals, vol. 36(S1), pages 5-27.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    3. Elisabetta Barone & Jacqueline Birt & Soledad Moya, 2014. "Lease Accounting: A Review of Recent Literature," Accounting in Europe, Taylor & Francis Journals, vol. 11(1), pages 35-54, June.
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    Cited by:

    1. Ireneusz Górowski & Bartosz Kurek & Marek Szarucki, 2022. "The Impact of a New Accounting Standard on Assets, Liabilities and Leverage of Companies: Evidence from Energy Industry," Energies, MDPI, vol. 15(4), pages 1-15, February.
    2. Renan Eidy Suzuki Tofanelo & Rodolfo Vieira Nunes & George André Willrich Sales, 2021. "IFRS 16 - Impact on the Assets of the Major Airlines Operating in Brazil," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(9), pages 1-1, August.
    3. Wafaa Salah, 2020. "The International Financial Reporting Standards and Firm Performance: A Systematic Review," Applied Finance and Accounting, Redfame publishing, vol. 6(2), pages 1-10, August.
    4. Legenzova Renata & Žilaitytė Liveta, 2023. "Does Transition to IFRS 16 Affect Companies Financial Performance: The Case of Baltic Listed Companies," Management of Organizations: Systematic Research, Sciendo, vol. 89(1), pages 67-86, June.

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    More about this item

    Keywords

    alternative performance measures; IFRS 16; financial leverage; lease; non-GAAP measures; performance;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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