From Leases to Ratios : The Impact of IFRS 16 on Financial Statements

Under IAS 17, around 85% of leases were reported as operating. Under IFRS 16, finance and operating leases are no longer separated. This study responds to the IFRS Foundation's call about the effects of implementing IFRS 16 by examining three types of effects: a combined effect, a business-as-usual effect, and an isolated IFRS 16 effect. Findings suggest that the isolated effect of IFRS 16 is the primary driver of statistically significant changes in assets, liabilities, operational income, EBITDA, and interest expenses, resulting in major changes in structure and liquidity ratios. However, profitability ratios (such as Return on Assets (ROA) and Return on Equity (ROE)) appear to be unaffected, and the combined effect is only significant for the interest coverage ratio. Further analysis was carried using the fuzzy-set Qualitative Comparative Analysis (fsQCA) to verify if combinations of entities’ characteristics may lead to higher or lower impacts on certain financial ratios. The models obtained reinforce the notion that the significance of IFRS 16's impact differs among entities, which may explain why statistical significance was not found in the total sample for ROA, and ROE. The results provide support to the main criticisms of IAS 17: that operating leases were improperly accounted for, and consequently, altered the picture of financial statements and financial ratios, a key source of information in valuing companies. This study also enriches the research regarding IFRS 16 implementation by revealing entity characteristics that explain differences on IFRS 16 effects