Impact of the New Zealand Equivalent to the International Financial Reporting Standard 16 Leases (NZ IFRS 16) on financial statements of listed companies

Abstract

In February 2016, the External Reporting Board (XRB) introduced the New Zealand version of IFRS 16 named the New Zealand Equivalent to International Financing Reporting Standard 16 Leases (NZ IFRS 16). Effective 1 January 2019, adoption of this accounting standard is compulsory for Tier 1 and Tier 2 for-profit entities (NZ IFRS 16, par. NZ 2.1). A review of existing academic and professional publications indicated the impact of capitalization of operating leases varies significantly depending on country and industry. Therefore, the study’s problem was linked to the impact of the NZ version of IFRS 16 (NZ IFRS 16) on the financial statements of the NZX listed firms. NZ IFRS 16 (Leases) requires companies to initially recognise right-of-use assets at cost and lease liabilities at present value (NZ IFRS 16, par. 22, 23 and 26). This study capitalizes the operating leases for a sample of 76 New Zealand listed firms using data obtained from the reported financial statements of these companies for 2017. The accounting treatment of the off-balance sheet operating leases is largely based on Constructive Capitalization by Imhoff, Lipe & Wright (1991), with several modifications based on the literature review. The findings are described by descriptive statistics and are tested with parametric and non-parametric statistical tools. Application of NZ IFRS 16 will produce a statistically significant effect on the metrics and ratios depicting the financial position and financial performance of the sampled firms, except for EBITDA and Interest cover. In addition, based on quantitative benchmarks of materiality identified by Eilifsen & Messier (2015), the impact of NZ IFRS 16 is material for the Profit before tax and Total assets metrics of the sampled listed companies. The study provides specific New Zealand evidence on the impact of implementation of NZ IFRS 16. The results can be used by stakeholders interested in information about the lease-related assets and obligations of firms operating in the New Zealand economy. Some findings about the impact of capitalization of operating leases are useful to management and/or the decision-makers of New Zealand listed firms.