IFRS 16 - Leases and its Effect on Management Bonus Systems

Mina Stanic

Student thesis: Master thesis


The focus of this thesis is the analysis of the new international accounting and financial reporting standard IFRS 16 - Leases and its effect on bonus systems. IFRS 16 - Leases was issued in January 2016, since the old leasing standard IAS 17 was outdated. IAS 17 has allowed lessees and lessors to distinguish between operational and financial leases. This has lead to the fact that 85% of all leases worldwide are presented as operational leases, meaning that a huge amount of leases does not appear on the balance sheet. Up until now investors and other users of financial statements did not have a fair picture of the companies assets and liabilities and thus its health. Furthermore, the comparability of companies was not possible. In order to improve accounting quality, IFRS 16 - Leases defines new rules for lessee accounting, namely the capitalization of all leases. From January 1, 2019 all companies following IFRS will have to account for all substantial leases as financial leases, i.e. to put all substantial lease assets and lease liabilities on their balance sheet and recognize a depreciation and interest expense in their income statements. As a consequence, the results in the income statement, balance sheet, cash flow statement, as well as the results of many KPIs, ratios and measures will be affected by the new rules. Bonus systems, which are using financial measures for targets, are also going to be affected. In the theory section of the thesis, performance measures and incentive systems are elaborated, serving as groundwork for the later analysis. In order to show the effects on a company, which follows IFRS, has a huge amount of operational leases and is representative for an industry which is going to be affected by the new standard to a high degree, the trade company REWE Group is analyzed in form of a case study. The analysis of REWE Group supports the predictions of many expert groups, namely that IFRS 16 will have an effect on measures such as EBITDA, EBIT, NOPAT, ROIC and EVA. Therefore, companies using these performance measures need to prepare their employees and adjust the bonus contracts well in advance. Lastly, expert opinions and advice on how companies should prepare for the upcoming changes are presented.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2016
Number of pages109
SupervisorsPeter Nordgaard Hansen