IFRS16: A Cost-Benefit Analysis

Charlotte Ravnsmed Bøgeskov

Student thesis: Master thesis


The overall purpose with this thesis is to examine whether the benefits arising fromthe implementation of IFRS 16 exceeds the expected costs and other administrativeburdens which is imposed on the affected companies. The previous accounting standard IAS 17 has been heavily criticized for many years, and especially the principle ofcategorizing the lease as either financial or operational, which led to two very differentaccounting procedures in the financial statement, while the operational leasingagreements did not result in recognition of any assets or liabilities.IFRS 16 brings all leases onto the balance sheet if the renewed definition of a lease ismet. Among others the consequence of this is a significant increase in several keyfinancial metrics, e.g. debt, total assets, financial gearing, and debt ratio. Furthermore, the classification in the profit and loss statement results in an increase inEBITDA as well. As one might infer, a number of different studies show that the effecton the financial statement differs quite a lot from company to company, and they alsoshow that some industries will be more affected than others. Especially the retail industry will be significantly exposed. This accounting change for the lessee creates amajor challenge for the companies and requires the need for rethinking how the internal administration and control of leasing are structured. The amount of prior operational leasing agreements, the systems in use, and the level of decentralization of theadministration are some of the parameters which influences how costly and difficultthe transition to IFRS 16 will be for the specific company. Furthermore, the use of theavailable practical expedients and modified retrospective approach to transition canhelp lower the cost for lessee as well, but the quality of the financial statements andthe comparability will suffer on this behalf.All of this led to the conclusion that the change in the accounting principles was indeed highly needed for the sake of the investors and other users of the financialstatement, for better transparency and comparability of the company’s financial position with others, and especially for those who take out loans to buy assets. For somecompanies, and even entire industries, the obstacles in the transition will be relativelyeasy to overcome, but for others the workload will be tremendous.Even though the new standard has improved compared to IAS 17, it still containssome questionable features and requires quite a few estimates and decisions, which inmy opinion has a negative effect and therefore will lower the expected benefits for theusers of the financial statements. IFRS 16 will also push back a lot of administrationand control assignments to the lessee for leasing of assets that might not be relatedto the operations of the company, or be significant or material for the company and itsfinancial statements, and therefore not even of particular interest to the investor oruser of the financial statement. With this argumentation the result is that it variesquite a lot from company to company in which direction the scale will tip in the costbenefit analysis, but for some companies it is my opinion based on this study that inits current form the costs and burdens associated with switching to IFRS 16 will outweigh the benefits, but at some point in the future it will most likely be leveled out.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2016
Number of pages104