IFRS 16: The Effects of the Conversion from IAS 17 to IFRS 16

Abstract

The new leasing standard, IFRS 16, was implemented on January 1, 2019. The new standard had been under development for over a decade with the purpose of replacing the former leasing standard, IAS 17. With the former leasing standard, IAS 17, the lessee had to classify the leasing contract as either a financial or an operational lease. This method was criticized, as only the financial leasing contracts appeared in the company’s balance sheets. The new leasing standard, IFRS 16, has only one recognition method that applies to all leases that are not in the scope of the exception rules. When implementing IFRS 16, the lessee has to recognize all former classified operational leasing contracts in the balance sheet, which will have an effect on the financial statements. This thesis will analyze the challenges relating to the conversion from IAS 17 to IFRS 16 with a focus on the presentation, accounting estimates, discount factor, and impairment test. Additionally, present thesis will conduct a comparative analysis of the two leasing standards to achieve an understanding of the similarities and dissimilarities between the IAS 17 and IFRS 16. Subsequently, the anticipated effect on the financial statements will be presented as well as IASB and experts’ expectations to IFRS 16. Current thesis will analyze Norwegian Air Shuttle ASA, hereinafter referred to as Norwegian, and the effect of IFRS 16 on the company’s 2019 financial statement. 95 % of Norwegian’s leasing agreements were operational leases when recognized after IAS 17 why the implementation of IFRS 16 would result in all these leases now having to be recognized on the balance sheet. In addition, the effect of IFRS 16 on the financial ratios will be analyzed. It can be concluded that the effect on the financial ratios is that the implementation of IFRS 16 affects the total long-term financial risk of Norwegian which appears higher with recognition after IFRS 16. In continuation of the comparative analysis, the criticism of IFRS 16 is analyzed where the main focus is the presentation, accounting estimates, discount factor, and impairment test. Finally, this thesis will discuss whether the IFRS 16 has met the anticipated effect and expectations from IASB and the experts. In this context, the criticism of IFRS 16 will also be discussed. Based on the analysis presented in current thesis, it is possible to conclude that IFRS 16 has performed according to the expectations. Yet, there are still some difficulties with the recognition of leases arising from IFRS 16, as the criticism suggests. One might ask whether the more informed users of the financial statements compensate for the administrative burden. In a couple of years when IFRS 16 has been implemented for several financial years, aforementioned question will be possible to answer. It will then be possible to measure the full effect for the users of the financial statement and the effect of the companies recognizing their leasing agreements after IFRS 16.