Implications of IFRS 16 on Maltese listed entities : a qualitative study

Abstract

Purpose: The objective of this study is to assess the influence of implementing IFRS 16 on the levels of gearing, profitability, and lease-related disclosures, four years after implementation. Additionally, the study aims to explore any pre and post-implementation concerns raised by CFOs of locally listed entities. Design: The objectives concerning the assessment of financial metrics and lease-related disclosures, were accomplished through a detailed content analysis of the financial statements published by local equity-listed entities. Meanwhile, the exploration of pre and post-implementation matters amongst preparers was achieved by conducting eight one-to-one semi-structured interviews with CFOs. Findings: The substantial grossing up of the SOFP is an immediate finding, whereby certain entities experienced an increase in their total liabilities of more than 70% and as anticipated, key financial metrics mostly relating to gearing were consequently affected. Notable changes were also evident in EBITDA figures, as an APM, whereby the metric reached new highs given the revised lease expense recognition. With respect to the disclosures, their extent was directly proportional to the materiality of the changes in the key financial metrics. Naturally, MLEs that were more materially impacted by IFRS 16 have dedicated more narratives in their financial statements, including management commentary; however, MLEs that experienced a little to no impact, have correspondingly made less reference to the standard. Regarding the emerging insights from the interviews, major concerns by preparers were as to how users will interpret the new changes, especially in view of their lack of accounting knowledge. On a similar note, the preparation of internal management accounts in line with IAS 17 was another crucial finding, suggesting that IFRS 16 interpretation may be too complex for country or division managers which are not accountants by profession. Other findings related to the challenges faced by preparers in determining the discount rate for future lease payments in circumstances where the rate is not implicit in the lease contract. Conclusions: With the availability of comparatives, IFRS 16 has now become the normality for lease accounting. Nevertheless, ongoing challenges are still being faced by preparers, more specifically by MLEs that encounter numerous lease modifications. Value: The analysis of the implications provides value to academia, practitioners, and stakeholders by improving their knowledge and understanding of the standard. This study adds to the existing body of knowledge and may serve as a future reference for preparers in considering the effect of leases on their distributable reserves.