Abstract
The adoption of International Financial Reporting Standard 16 (IFRS 16) represents a
significant change in lease accounting. IFRS 16 was introduced for years of
assessments beginning on or after 1 January 2019. The most significant change which
IFRS 16 introduced is that the two lease models for lessee accounting, prescribed by
International Accounting Standard 17 (IAS 17), are eliminated, and a single lease
model is introduced. The main aim of IFRS 16 is to improve transparency and
comparability of leasing arrangements by capitalising all lease assets and liabilities to
the Statement of Financial Position (SFP). IFRS 16 eliminates off-balance sheet
(OBS) leases, and all lease activities are now included in the financial statements. A
quantitative research methodology was adopted in this paper to evaluate the impact
of IFRS 16 statistically. The Wilcoxon signed-rank test was used to analyse the impact
of IFRS 16 on financial ratios (Return on Assets (ROA), Debt-to-Equity (D/E), and
Debt-to-Asset (D/A)). The financial ratios were determined before adopting IFRS 16
and then re-calculated post-adoption. The change in ratios was then evaluated for
statistically significant changes from adoption. Secondly, the Kruskal-Wallis test was
used to determine if changes in total assets, total liabilities, and financial ratios (ROA,
D/E, and D/A) impacted companies of various sizes differently.
This paper found that adopting IFRS 16 significantly changed the results reported in
the financial statements. Specifically, recognising lease assets and liabilities
significantly changed key ratios, including D/E and D/A. The ROA ratio was the only
financial ratio evaluated in this study that did not change significantly upon adoption.
This paper found that companies of all sizes (small, medium, and large market
capitalisation) were affected similarly when considering the changes in total assets,
total liabilities, and ROA, D/E, and D/A.
The International Accounting Standards Board’s (IASB) objective with IFRS 16 was to
improve comparability and transparency of leasing transactions. This objective was
achieved by introducing a single lease model that capitalises all lease assets and
liabilities to the SFP. The single lease model promotes consistency and uniformity in
the treatment of leasing arrangements as similar classification, measurement,
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recognition, and disclosure requirements are applied to all leasing arrangements
across different companies and industries.
The findings of this paper contribute to the literature from two perspectives. The first
is the theoretical implication of this research. This research evidence that the IASB
achieved the objectives of IFRS 16 as the criticisms on comparability and transparency
noted under IAS 17 are effectively addressed. This research evidence that
capitalisation of leases re-instates missing assets and liabilities related to leasing
activities on the SFP, and the findings indicate that previously understated gearing
ratios are now appropriately reflected. The research also contributes to the body of
knowledge that previously estimated the impact of IFRS 16 by quantifying the impact
of adoption on financial ratios by confirming estimated impacts from previous research
performed.
Secondly, from a practical perspective, this study provides evidence to accountants,
financial analysts, practitioners, and users of financial statements to understand the
impact of IFRS 16 adoption on the South African mining industry. This research
contributes to standard-setting practices as the results can be considered for future
standard-setting processes. Of particular relevance to the standard-setting process
are the results which indicate that companies of different sizes are affected similarly
by adoption, evidencing that the standard is suitable for different company sizes.
Secondly, from a regulatory perspective, the research provides evidence of the
effectiveness of the standard to re-instate lease assets and liabilities, and the
outcomes noted can be considered for amendments to the accounting requirements
of the standard. This research provides brief insights into the adoption methods
applied, which could be considered in future standard developments. The findings of
this study can contribute to the post-implementation review (PIR) process of the IASB
as the evidence reported could be considered for global comparison between different
countries and industries.