Strategizing IFRS 16 – Leases and Real Estate : Exploring implementation and contractual strategies relating to new accounting regulation
Abstract: Traditionally Operational Leases have been exempted from being recognized on the balance sheet of the financial statements. With the new leasing regulation presented by the International Accounting Standards Board (IASB); International Financial Reporting Standards 16 (IFRS 16), with effective date of 2019‐01‐01 operational leases are to be accounted for as finance leases, being capitalized into the balance sheet as a right of use asset and lease liabilities. This will affect the financial statement considerably for some heavy users of operational leases, such as retailers, whereas another factor that also have an impact is balance sheet composition before implementation. Many key ratios will also be affected and it is expected that for some long‐term companies, such as production companies, will take the lease or buy decision up for more serious discussion. This is because operational leasing no longer can be used to balance financing and debt as it has been used in the past. The implementation of the standard will be considerably heavier administration‐wise for companies with no previous financing leases since they do not currently have system support for lease valuations or advanced administration processes surrounding operational leases. This is common for firms with leased space as a big part of their operations, such as retailers. Implementation will be a big project for many enterprises and the effect on the balance sheet may be finished very close to effective date, resulting in that some shortcuts may be taken. This could result in a higher lease debt than necessary as there are many assumptions and interpretations to be made during the implementation process. These assumptions and adjustments are expected to be continuously worked on by companies to reevaluate and decrease lease debt, where incentives to do so exist. A qualitative interactive inductive approach, using semi‐structured interviews is used in this study to explore and dig deeper into possible strategic redesigns of contractual clauses to decrease the effect this standard would have on financial statements. The possible strategies described are to be viewed as possible changes that would reduce the effect on the balance sheet where a company has incentives to do so. There also seem to be changes within the retail market that could change contract structure in the future, independently of IFRS 16. However, these changes could in turn be used to argue for assessments regarding lease terms that would decrease the effect on a company’s balance sheet in accordance with IFRS 16.
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