How will IFRS 16 affect annual financial statements?

Two auditors and one researcher have examined how IFRS 16 will affect the balance sheet values of leases of listed companies in Norway. This is what they found.

Associate Professor at BI Norwegian Business School Tonny Stenheim and auditors Harutjun Mesrobian (PwC) and Kjetil Tveit Moen (KPMG) reviewed the financial statements of 197 companies listed on the Oslo Stock Exchange. They simulated the effect of IFRS 16 on annual financial statements of varying scopes.

EBIT up by almost 60 per cent
When they consolidated the figures for all companies outside the finance sector, they found the following:

● Balance sheet assets increased by almost 6.8 per cent.
● Balance sheet liabilities rose by almost 9.4 per cent.
● There was a small change in equity.
● EBITDA increased by 20 per cent.

“The new rules resulted in changes in all the key ratios that we looked at. The return on capital figures improved after restatement, while the debt-to-equity ratio increased and the equity ratio fell,” they summarised.

Balance sheet values vary depending on industry
The greatest changes in carrying amounts was observed in the retail sector, where companies tend to have multiple tenancy agreements. While the average for all industries (except finance) was 6.8 per cent, balance sheet values in the retail industry rose by 26.6 per cent. At 19.3 per cent, the transport industry also posted above-average increases in balance sheet values, while commercial service providers also came in above average.

“On their own, the three companies with the highest number of operating leases in terms of value, Statoil ASA (now Equinor), Norwegian Air Shuttle ASA and BW Offshore Limited accounted for 37 per cent of the increase. This confirms our assumption that some industries and companies make more use of operating leases than others. We found that the most affected industries were all capital-intensive industries with high investment requirements,” the authors confirmed.

Income statement also affected
Key ratios such as EBITDA are also affected by IFRS 16 due to the fact that lease costs are now recognised as depreciation and interest expenses rather than as direct costs. As with balance sheet values, retail and transport operators and commercial service providers are the most affected. EBITDA of companies listed on the Oslo Stock Exchange in these industries increased by around 50 per cent.

“Net profit for the year is not affected to the same degree as EBITDA. In most cases, the effect of reversing direct operating lease costs will be partially offset by new depreciation charges and interest expenses. However, we found that the net profit for the year rose for companies with significant operating lease costs, but relatively low future lease obligations. We also found that in some cases the annual net profit fell for companies with low operating lease costs, but high future lease obligations,” concluded Stenheim, Mesrobian and Tveit Moen.

Improved operating margin
The authors also examined a number of other key ratios, such as the operating margin (OM), return on assets (ROA) and the equity ratio.

● They found that the operating margin for all industries taken together increased from 7.5 per cent to 10.2 per cent. The largest increase was seen in the oil industry.
● ROA rose on average from 1.7 per cent to 2.2 per cent.
● The equity ratio for all industries viewed as a whole decreased slightly, from 38.8 per cent to 37.3 per cent. However, here we found major differences between industries, with the greatest decrease in retail.

About the study
The study was carried out as a quantitative study of listed enterprises in Norway based on information in annual reports from 2015. The accounting figures for 2015 were restated to comply with IFRS 16 to the greatest extent possible. The actual method used to restate the accounting figures was the balance sheet method.

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