The Implementation Impact of IFRS 16: Leases on JSE Listed Technology and Telecommunication Companies Using a Constructive Capitalisation Model

  • Carley Cumming Lecturer at University of KwaZulu-Natal
  • Harold Galt Lecturer at University of KwaZulu-Natal
Keywords: constructive capitalisation; finance leases; IFRS 16; off-balance sheet financing; operating leases

Abstract

Abstract: Objectives: This study used a constructive capitalisation model to assess the likely impact IFRS 16 will have on a company’s financial statements and ratios when it is implemented; this article analysed this expected impact on the financial position, financial performance and market ratios for technology and telecommunication companies. Prior work: This study builds on prior lease accounting research.  Approach: A two sample (paired) t-test was used to test the magnitude of the change that occurred in the financial statement ratios after applying the constructive capitalisation model. The two samples consisted of the financial ratios before operating leases were capitalised, compared to the financial ratios post-capitalisation for JSE listed technology and telecommunication companies Results: The analysis of the data revealed that when the constructive capitalisation model is applied it results in changes in the financial position, financial performance and market ratios for both the technology and telecommunication populations. Despite a number of these changes being significant for the technology population, the changes for the telecommunication population were not considered significant. Implications: Those companies that have material operating leases should assess what impact IFRS 16 will have on their financial statements and financial ratios before the new lease standard IFRS 16 comes into effect.  Value: For entities that have a significant number of operating leases, IFRS 16 is anticipated to materially affect the figures in the financial statements, capital structure, as well as liquidity and profitability ratios. Numerous stakeholders rely on these reported figures and ratios when making entity-related decisions.

References

Beattie, V., Edwards, K., & Goodacre, A. (1998). The impact of constructive operating lease capitalisation on key accounting ratios. Accounting and Business Research, 28(4), 233-254.
Bennet, B. K., & Bradbury, M. E. (2003). Capitalizing non-cancelable operating Leases. Journal of International Financial Management and Accounting, 14(2),101-113.
Correia, C., Flynn, D., Uliana, E., & Wormald, M. (2015). Financial Management. 8th ed. Landsdowne: Juta.
Correia, C., Flynn, D., Uliana, E. & Wormald, M. (2011). Financial Management. 7th ed. Cape Town: Juta.
De Oliveira, S. (2016). The new IFRS 16: A huge undertaking for the leasing industry. Available at: https://www.les-experts-denjean-associes.com/the-new-ifrs-16-a-huge-undertaking-for-the-leasing-industry. Accessed: 21 December 2018.
De Villiers, R. R., & Middleberg, S. L. (2013). Determining the impact of capitalising long-term operating leases on the financial ratios of the top 40 JSE-listed companies. International Business & Economics Research Journal, 12(6), 655-669.
Dillion, J. (2014). Impact of constructive capitalisation of operating leases on South African companies considering new proposed lease accounting rules.(Unpublished master's thesis). University of Cape Town, Cape Town, South Africa.
Durocher, S. (2008). Canadian evidence on the constructive capitalization model of operating leases. Accounting Perspectives, 7(3), 227-256.
Duke, J. C., & Hsieh, S. J. (2006). Capturing the benefits of operating and synthetic leases. Journal of Corporate Accounting & Finance, 18(1), 45-52.
Ernst and Young. (2016). A summary of IFRS 16 and its effects. Ernst & Young. Available at: https://www.ey.com/Publication/vwLUAssets/ey-leases-a-summary-of-ifrs-16/$FILE/ey-leases-a-summary-of-ifrs-16. Accessed: 29 January 2018.
Fulbier, R. U., Silva, J. L., & Pferdehirt, M. H. (2008). Impact of lease capitalisation on financial ratios of listed German companies. Schmalenbach Business Review, 60, 122-144.
International Accounting Standards Board (IASB). (2016a). IFRS 16: Leases. In International Financial Reporting Standards. London: IFRS Foundation.
International Accounting Standards Board (IASB). (2016b). IAS 37: Provisions, Contingent Liabilities and Contingent Assets. In International Financial Reporting Standards. London IFRS Foundation.
International Accounting Standards Board (IASB). (2016c). IFRS 16: Effects Analysis. In International Financial Reporting Standards. London IFRS Foundation.
International Accounting Standards Board (IASB). (2013). Basis for Conclusions Exposure Draft ED/2013/6 Leases. London: IFRS Foundation.
International Accounting Standards Board (IASB). (2010). IAS 17: Leases. London: IFRS Foundation.
Imhoff, E. A., Lipe, R. C., & Wright, D. W. (1997). Operating lease: Income effects of constructive capitalisation. Accounting Horizons, 11(2), 12-32.
Imhoff, E. A., Lipe, R. C. & Wright, D. W. (1991). Operating leases: Impact of constructive capitalisation. Accounting Horizons, 5(1), 51-63.
Jesswein, K. R. (2009). Analysing creditworthiness from financial statements in the presence of operating leases. Academy of Accounting and Financial Studies Journal, 13(1), 75-90.
Koppeschaar, Z. R., Rossouw, J., Sturdy, J., Van Wyk, H. A., Gaie-Booysen, F.F., Papageorgiou, K., Smith, C., Van der Merwe, C.M., & Schmulian, A. (2016). Descriptive Accounting. 20th ed. Durban: LexisNexis.
PricewaterhouseCoopers (PwC). (2018). CFO's guide: Which sectors and groups will be most impacted by IFRS 16 in the Middle East. Available at: https://www.pwc.com/m1/en/media-centre/articles/cfo-guide-which-sectors-and-groups-will-be-most-impacted-by-ifrs-16.html. Accessed: 20 September 2018.
PricewaterhouseCoopers (PwC). (2016). In the spotlight an industry focus on the impact of IFRS 16 - Communications. Available at http://blog.innervision.co.uk/blog/industry-focus-assessing-the-impact-of-ifrs-16-on-the-telecommunications-industry. Accessed: 15 September 2018.
Securities and Exchange Commission (SEC). (2005). Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by the Issuers, s.I.: United States Securities and Exchange Commission.
Service, C. (2018). Gripping Gaap. 19th ed. Durban: LexisNexis.
Sharenet. (2018). Top 100 companies by market capital. Available at http://www.sharenet.co.za/index.phtml?content=/free/topco.phtml [Accessed 15th September 2018].
Stainbank, L., Oakes, D., & Razak, M., (2012). A Student's Guide to International Financial Reporting. 8th ed. Eston: S&O Publishers.
Stainbank,L., Oakes,D., & Razak, M., (2016). A Student's Guide to International Financial Reporting. 10th ed. Eston: Novus Holdings.
Tai, B. Y. (2013). Constructive capitalization of operating leases in the Hong Kong fast-food industry. International Journal of Accounting and Financial Reporting, 3(1), 128-142.
Vorster, Q., Koornhof, C., & Oberholster, J., Koppeschaar, Z., Coetzee, S., Janse van Rensburg, C., Binnekade., C., (2008). Introduction to IFRS. Durban: LexisNexis.
White, E. (2016). Global leasing report, s.l.: White Clarke Group.
Published
2020-12-02
Section
Articles