Analysis of the effect of the implementation of IFRS 16 Leases on the financial ratios of retail companies listed on the JSE

Abstract

The International Accounting Standards Board introduced the International Financial Reporting Standard (IFRS) 16 Leases in order to enhance the faithful representation of all lease transactions on the Statement of Financial Position for lessees, in particular. The first-time implementation of IFRS 16 Leases had a significant impact on the financial statements of retail companies since they have a common practice of entering into high-value lease agreements. This study aimed to analyse the effect that the first-time implementation of IFRS 16 Leases had on key financial ratios of retail companies listed on the Johannesburg Stock Exchange. A content analysis was adopted as this study’s research method. The results showed that the first-time implementation of IFRS 16 Leases had a notable effect on all profitability and gearing/leverage ratios analysed. Debt/equity and debt/asset ratios mostly increased since debt levels had, on average, a greater increase than assets recognised with the first-time implementation of IFRS 16 Leases not previously accounted for in the Statement of Financial Position. Overall, the return-on-asset ratio decreased due to an increase in assets recognised and a decrease in earnings resultant from an increase in depreciation and interest expense. Earnings before interest, taxation, depreciation and amortisation percentage increased overall. The results for return on equity are inconclusive since half the companies experienced a decrease in the ratio and the other an increase. It is important for shareholders and any other investors to take into consideration the effect of IFRS 16 Leases before buying/selling shares or investing solely on the increase or decrease in the ratios.