IFRS 16 - So far so good? A post-implementation review of the new leasing standard of listed firms in Sweden

Abstract

On January 1st 2019, the new leasing standard International Financial Reporting Standard (IFRS) 16 Leases became effective. The main distinction with the new standard is that nearly all leases have to be capitalized and put on the balance sheets, hence the option of off-balance sheet lease financing and its favorable consequences is no longer available. In this study, we investigate whether incentives previously relevant for off-balance sheet lease financing are still relevant in spite of the standard change. We also investigate whether there are any significant differences in the implementation of IFRS 16 between industries. We use a sample of 110 Swedish firms, listed on the OMX Nordic Exchange Stockholm. We develop our own dependent variable, which is a ratio between the total value of leases as of March 31st 2019 (post-implementation) and the total value of leases as of December 31st 2018 (pre-implementation). This ratio enables us to test if our identified incentives of interest are still relevant, and facilitates the detection of any potential industry differences concerning the implementation of IFRS 16. We identify three different incentives in previous literature that we hypothesize will have an impact on the total value of leases after implementation of IFRS 16. The three incentives are a profitability metric, debt covenants and debt capacity. In line with predictions in literature pre-implementation, we find that stricter debt covenants lower the total value of leases post-implementation. This indicates that firms avoid bringing all leases to the balance sheets in order to not violate debt covenants. However, we find weak or no evidence that the other incentives affect the total value of leases post-implementation. Neither do we find any evidence for differences between industries regarding how they have adapted to IFRS 16.