Changes New Leases Standard IFRS 16 Has Brought and Evaluation of Its Possible Effects on Financial Reports and Financial Ratios of Corporations

Abstract

Existing financial reporting standards related to leases (IAS 17 – Leases) classify leases as “finance leases” and “operating leases” and leases are reported accordingly. However, this approach has been criticized for many years by related parties. A New Standard (IFRS 16 – Leases) prepared taking the criticisms into account removes the “finance leases” – “operating leases” classification and determines a single model for the lessee. With the introduction of the New Standard, businesses that use operating leases in high amounts and keep them off the balance sheets before will experience a major increase in assets and liabilities, decrease in equity, and deterioration in some financial ratios associated with them. In this study, how IFRS 16 would affect financial statements and certain financial ratios has been investigated. First, the issue has been illustrated through a hypothetical business in comparison with IAS 17. Then, using financial statements of a public retail company (BIMEKS Inc.) and a public airline company (Pegasus Inc.), possible effects of the New Standard on financial statements and financial ratios have been determined. The results show that there will be a significant increase in the debt ratios of corporations, especially for Pegasus, when reported according to IFRS 16. The impact on the profitability ratios of enterprises, which are already operating with low profitability ratios, is moderate. Financial statements of the firms in different sectors could be affected in different ways and levels from the new standard depending on the intensity of the lease contracts. For this reason, subsequent studies may focus on the assessment of sectoral effects and the reflection of these effects on financial statements throughout the operating lease period.