Does the IFRS 16 affect the key ratios of listed companies? Evidence from Poland

Leasing is a popular source of financing as an alternative to a loan worldwide, including in Poland [Barone et al., 2014]. Leasing is easier to obtain and involves less-complicated creditworthiness analysis procedures than a loan, and it is cheaper or more cost-effective on closer analysis [Taylor, 2011; Jaszczuk et al., 2018].

In Poland, medium-sized and large companies more eagerly use capital leases than small firms. This is affected by tax regulations that are less restricted for small and micro-sized enterprises [Białek-Jaworska et al., 2014; Białek-Jaworska and Nehrebecka, 2016]. More long-term loan financing results in less capital leasing, which indicates the long-term bank loan and capital lease substitutability [Marston and Harris, 1988; Beattie et al., 2000; Singh, 2011; Lin et al., 2013]. Białek-Jaworska et al. [2014] confirm the substitutability of an operating lease and a short-term bank loan, similar to the reports by Beattie et al. [2000], Filareto-Deghaye and Severin [2007], and Singh [2011].

In 2019, the total financing of the Polish leasing industry amounted to PLN 77.8 billion, while the total value of the leasing industry's active portfolio increased by 9.4% year-on-year to 160.4 billion. The European Commission also confirmed that 63% of small and medium-sized Polish enterprises identified leasing in 2019 as an essential source of financing their activities [European Commission, 2019].

Although a popular financial instrument, leasing raises controversies among regulators, preparers, users, and researchers [Mellado and Parte, 2017], who are concerned about its division into operating leases and finance (capital) leases. While the line between the two is blurred, the accounting methods differ significantly. The distinction between operating and capital leases has been made in International Accounting Standard (IAS) 17 [McGregor, 1996]. The different accounting treatment of leasing in accounting records and financial reporting affected the financial performance of companies, e.g., higher earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA) with capital lease financing [Imhoff et al., 1991]. The conclusion of the research conducted so far was unambiguous that the existence of two different ways of recognizing similar finance and operating leases affects the various dimensions of an entity's financial and asset position and adversely affects the comparability of financial statements. The answer to these dilemmas is the International Financial Reporting Standard (IFRS) 16, under which a contract is considered a lease “if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration” [International Accounting Standards Board [IASB], 2016a]. Hence, introducing IFRS 16 in 2019 marks the end of the distinction between operating leases and financial leases because the “right to use asset” and the “lease liability” will be carried into the balance sheet [Rey et al., 2020]. IFRS 16 allows for greater transparency and comparability of financial statements, but it is also a challenge for corporate finance managers in the context of reviewing existing leases. Furthermore, the new regulation creates an obligation to reflect the value of all leases in nonfinancial assets in the form of right-to-use assets and liabilities. Finally, the unification of the presentation of the off-balance-sheet (operating) and on-balance-sheet (financial) leases will also be noticeable in the cost structure [IFRS 16, 2016]. Although the IFRS 16 approach aims to help users’ decision-making processes, preparers are concerned about its costs and consequences [Mellado and Parte, 2017].

The regulators’ new view of leasing has prompted research to compare the financial position of companies when accounting for leasing under IAS 17 and IFRS 16. Researchers use a variety of calculation approaches, i.e., Imhoff's capitalization method, bankruptcy prediction models, or models based on the ordinary least squares method [Imhoff et al., 1991; Branswijck et al., 2011; Fitó et al., 2013; Öztürk and Serçemeli, 2016; Garvie et al., 2017].

The article aims to present the materiality of the impact of IFRS 16 on the assets and financial position shown in the financial statements, including on the financial ratios of lessees. The analysis covers financial data from the financial statements of 431 nonfinancial companies listed on the Warsaw Stock Exchange (WSE) for 2018 and 2019 (1 year before and after the implementation of IFRS 16). The study uses the difference-in-differences (DID) method, which minimizes the impact of time constant factors on the model.

Five research hypotheses were verified in the article. Four of them concern the significance of the impact of the introduction of IFRS 16 on selected financial ratios: return on sales (ROS), return on assets (ROA), return on equity (ROE), debt, and liquidity. In particular, we expect that companies listed on the WSE preparing their financial statements in 2018–2019 under IFRS would show a more significant change in financial ratios for 2019 (after the implementation of IFRS 16) compared to those for 2018 than companies preparing their statements following the Polish Accounting Act. Finally, the fifth hypothesis concerns the differential impact of IFRS 16 on the financial ratios between industries.

The study adds to the body of knowledge within national accounting research. There are a few national studies on the materiality of the influence of IFRS 16 on financial statements and lessees’ financial ratios [Öztürk and Serçemeli, 2016; Tofanelo et al., 2021]. They are generally based on a small research sample. They do not take a holistic view of the subject matter undertaken (i.e., small number of metrics and failure to include the sector factor in the analysis) [Krawczak and Dyląg, 2018].

The results of the empirical study extend knowledge in the context of international studies assessing the effects of the implementation of IFRS 16–Leases on financial statements and financial measures. Previous foreign studies have covered different geographical areas, mainly well-developed countries (e.g., the USA, Spain, and Belgium; or the Netherlands, Germany, and the UK) [e.g., Branswijck et al., 2011; Garvie et al., 2017; Giner and Pardo, 2018] than Poland. Furthermore, a review of the articles shows that mainly companies from Anglo-Saxon and Western European countries have been analyzed [Barone et al., 2014; Wong and Joshi, 2015]. Consequently, our study complements the knowledge of the examined issues in the context of developing countries [Öztürk and Serçemeli, 2016; Tofanelo et al., 2021] or Central and Eastern Europe (CEE) countries [Białek-Jaworska et al., 2014].

The added value can also be seen in the DID method, which allows assessing the materiality of the IFRS 16's impact on selected financial ratios of lessees. The methods used by researchers in the literature have been based on data estimates rather than actual data. Our study is the first to use the DID method to analyze the effects of implementing IFRS 16, owing to the possibility of identifying a control sample of Polish companies that do not apply IFRS when preparing their financial statements. Furthermore, Poland provides unique conditions for this study due to the inability to use IFRS by companies that do not apply for admission of their securities to listing on a regulated market within the European Economic Area (EEA) or are not part of business groups listed on a stock exchange.

The article consists of four parts. The first one refers to the literature review describing the research showing the tendency of changes in ’financial statements of companies that so far have financed themselves with operating leases due to IFRS 16 coming into force. Moreover, it presents the results of empirical research conducted so far on an international scale assessing the impact of introducing a uniform way of accounting for leasing agreements on the image of financial and asset situation presented in the financial statements. The second part of the article presents hypotheses formulated based on the literature review and available results of empirical research. The third part describes the applied research methodology, and the fourth part presents the results of our own empirical research. Finally, the article ends with a summary.

The analyses carried out by foreign and, to a lesser extent, domestic researchers on the topic and their results allowed the formulation of research hypotheses regarding the expected changes in individual balance sheet components and financial ratios.

Table 1 presents the financial ratios analyzed in the empirical study, their definitions, and the expected change based on the literature due to the entry into force of a uniform accounting method for leasing contracts. Based on the results of previous empirical research, it has been speculated that the application of IFRS 16 for the first time in 2019 by Polish companies using operating leases will significantly affect their financial and asset position, as shown in their financial statements. This mainly refers to the profitability, debt ratios, and liquidity ratios.

In particular, it is expected that companies listed on the WSE, preparing their financial statements in 2018–2019 under IFRS, after the implementation of IFRS 16 (in 2019) will show the following: on average, a greater increase in ROS (H1) because of an expected rise in operating profit (due to reclassification of former lease costs to depreciation expense and finance costs); on average, a greater decrease in ROA (H2A) due to a rise in the value of the company's lease assets due to capitalization of leases; and a greater increase in ROE (H2B) owing to a higher increase in gross profit than equity; an increase in the debt-to-equity and general debt ratios (H3) due to the recognition of the lease obligations in the entity's balance sheet, thereby increasing the reported debt; on average, a more significant decrease in current liquidity ratio (CR) (H4) than companies preparing their statements under the Accounting Act. The latter is assumed because current lease liabilities will increase while current assets will not. Similar results were expected in the literature [IASB, 2016; KPMG, 2017; Stancheva-Todorova and Velinova-Sokolova, 2019; Raoli, 2021].

The formulated research hypotheses are presented below:

H1: The adoption of IFRS 16 increases sales profitability (ROS).

A fifth research hypothesis (H5) was added to the above research hypotheses, linking the average changes in the financial ratios included in the analysis to the sector (industry) to which the company belongs. The results of the studies by Branswicka et al. [2011], Fitó et al. [2013], and Díaz and Zamora [2018] indicated an existing relationship between the sector and the intensity of changes in financial ratios due to the capitalization of operating leases. For H5, the materiality of changes in the financial ratios of WSE-listed companies that prepared their financial statements under IFRS in 2018–2019 is expected to be significantly different depending on the sector in which the company operates.

As part of the empirical study, estimations of 10 models described by the equation according to Eq. (1) with the DID method for 988 observations were carried out in the STATA program. In addition, it allows convenient estimation of the p-value for the DID variable, which allows assessing whether there are grounds to reject the hypothesis of the significance of the impact of the introduction of IFRS 16 on a given indicator (see Table 6).

In the case of linear regression in the DID method, the parameter estimates with the variables year and standard are equal to the difference in the average values of the indices between the groups to which they belong.

The obtained results of the estimation of six models give grounds to reject the hypotheses H1, H2A, H2B, and H4 concerning the influence of the change in the standard of accounting for leasing contracts on the size of the profitability ratios, namely, ROS, ROA, and ROE; and the CR, of the companies included in the study. However, in the fourth model, where the dependent variable is the debt-to-equity ratio, the coefficient of the DID variable is significant at the 10% level. Hence, we have no basis for rejecting hypothesis H4 regarding the impact of entry into force of IFRS 16 on companies’ debt ratios.

The diversity of the research sample affects the high value of the standard deviation of the variables. At the same time, the database contains outlier observations significantly. Thus, there is a risk that they may substantially distort the results of the conducted study. Therefore, each of the six models was reestimated on the following transformed research samples:

reduced by observations smaller than the first percentile and larger than the 99th percentile (research sample one percentile [1p]) (Table 7);

Reducing the research sample by one percentile of outlier observations (Table 7) increased the coefficient of determination R² in each of the six estimated models. For the cutoff test sample, the significance of the change in the accounting treatment of leases’ effect on the value of the debt-to-equity ratio increased. In addition, the impact of introducing a new standard on the ROA ratio was also found to be significant in the cutoff research samples. It is also worth mentioning that a coefficient for the standard variable was significant at the 10% level in four models. This means that in these samples, the difference between the values of the profitability ratios (i.e., ROS, ROA, and ROE), as well as the CR between companies preparing financial statements under the Polish Accounting Act and those applying IFRS, is statistically significant, regardless of the year for which the reports were prepared. Similarly, the average change in the ROA ratio and the debt-to-equity ratio between 2018 and 2019 is statistically significant, regardless of the accounting policy applied.

In the research samples constrained by the value of the fifth and ninety-fifth percentiles (Table 8), the value of the coefficient R² improved relative to the research sample only in Models 1, 2, and 5. Moreover, it worsened in Model 4, in which the effect of the change in lease accounting on the debt-to-equity ratio became statistically insignificant. On the other hand, in Model 5, the DID variable, which estimates the impact of the new IFRS on the total debt ratio, showed significance at the 5% level. This indicates that there are no grounds to reject H3.

In Model 2, despite an improvement in R², the significance of the average change in the ROA ratio did not increase compared to the model on the sample after truncation of 1p outliers; again, it became statistically insignificant. Furthermore, significant differences between the mean values of the ratios depending on the accounting policy applied occurred in the case of models in which the explanatory variables were the profitability ratios (ROS, ROA, and ROE) and the CR.

The results obtained for both the original and the cutoff research samples allow us to reject hypotheses H1, H2B, and H4, while they do not provide grounds to reject H3. The entry into force of IFRS 16 on January 1, 2019, significantly increased the debt and (to a lesser extent) the ROA ratios of companies listed on the WSE in 2018–2019.

In the empirical study undertaken, profitability ratios were additionally analyzed in detail. So far, profitability ratios (i.e., ROS, ROA, and ROE) have been analyzed net, i.e., using the value of net income in the numerator of the ratio formula. They indicate the company's profitability after considering all costs and income tax. However, using this measure raises the concern that the direct influence of capitalization of operating leases on the level of net income, signaled in the literature, may distort the results. This is because its value decreases in the initial stages of the lease agreement and then increases [Goodacre, 2003]. Therefore, we also estimated models for profitability ratios at operating activities, i.e., having EBIT in the numerator, to analyze average changes in profitability ratios excluding this dependence. This made it possible to reduce the standard deviation of these ratios (see Tables 9 and 10).

Based on the estimations of Models 7, 8, and 9, it can be concluded that the introduction of the new standard will not significantly affect operating profitability ratios. For the models mentioned above, estimations were also carried out for the cutoff samples by 1p and 5p outliers, but the results obtained were analogous to those obtained from the analysis of Models 1, 2, and 3. Therefore, they did not affect the conclusions of the study.

To verify hypothesis H5, DID estimation was also used on additionally extracted subgroups. The results of this are presented in Tables 11–14.

In line with intuition, the DID variable for the model testing the significance of the impact of IFRS 16 on the debt-to-equity ratio turned out to be significant in the sectors with the highest average value of lease liabilities, namely, trade and services. Therefore, Model 4 estimated on these subsamples is also characterized by a higher R² coefficient.

Moreover, among the companies in the trade sector, in as many as three models, namely, Models 2, 4, and 5, despite the insignificance of the DID variable, there was a significant difference between the average values of the ratios between companies keeping their accounts under the Polish Accounting Act and those applying IFRS. Therefore, the results above do not warrant rejection and confirm hypothesis H5 about the significance of the industry effects of the new standard's (IFRS 16–Leases) impact on financial ratios.

To sum up, the entry into force of the new IFRS 16 standard had no significant impact on the profitability ratios (except for ROA in the sample after removing outliers) and the liquidity of the studied companies. The results of the empirical study are opposite to the findings of foreign research in this regard, which pointed out the significant impact of IFRS implementation on the elements of financial statements and financial ratios [Öztürk and Serçemeli, 2016; Díaz and Zamora, 2018; Tofanel et al., 2021]. However, in part, the results are consistent with the study of Todorova and Velinova-Sokolova [2019]. However, in the area of liquidity, the researchers indicated a decrease in the ratio or no change in the net cash flow measure. ROS or ROE did not show a clear answer because these indicators depend on various factors, e.g., the effect of profit or loss. Furthermore, based on the study results, no grounds were found to reject hypothesis H3. Thus, we confirmed that the change in the standard of presentation of leases from IAS 17 to IFRS 16 increased the debt ratio. This result is consistent with the findings of studies by Stancheva-Todorova and Velinova-Sokolova [2019] and by Raoli [2021]. Researchers indicate that if lease obligations increase the total liabilities on an entity's balance sheet, they increase the reported debt burden.

The unification of the accounting treatment of leasing contracts significantly affects the increase in lessees’ debt ratios. Furthermore, belonging to a sector characterized by higher lease liabilities affects the significance of the changes caused by the new standard. On this basis, H5 can be confirmed for the trade and services sectors. This is in line with the study of Díaz and Zamora [2018]. The authors found that IFRS 16 affects key balance sheet financial ratios (mainly leverage ratios), but this impact depends primarily on the entity's sector. According to the researchers, the most affected sectors are retail, hospitality, and transportation.

Empirical studies to date have indicated a significant impact of the new accounting treatment of leases under IFRS 16 on the financial and asset position of lessees as presented in the financial statements. Researchers inferred this based on estimation of the capitalization of operating leases on financial data for 1 year using bankruptcy prediction models or simple linear regression using the ordinary least squares method. Operating leases’ capitalization affects the balance sheet by increasing right-of-use assets and liabilities by lease liabilities. In addition, it affects the income statement by changing the classification of leasing costs. However, these changes were only estimated [Branswijck et al., 2011; Garvie et al., 2017; Giner and Pardo, 2018]. Therefore, the real impact of IFRS 16 on the financial data of companies could not previously be directly observed until 2019, the year of introduction and the first year of application of the new standard.

The study contributes to science on accounting and business practice in this regard. Our article extends previous research in two respects. First, it contributes to accounting research, specifically previous research in leasing. It shows the impact of “the leasing revolution” in the form of a new regulation – IFRS 16 – on the financial position, including the financial ratios of companies. However, our study coincides with the arguments of foreign researchers in the context of sectoral/industry analysis [Branswijck et al., 2011; Díaz and Zamora, 2018]. Second, this study will contribute to the new lease accounting standard literature. No previous research has tested the impact of lease capitalization on financial statements and financial ratios under Polish conditions. In this way, we add new knowledge from the analyzed research problem related to developing countries, which complements the available results among developed countries, mainly Anglo-Saxon countries [Wong and Joshi, 2015; Giner and Pardo, 2018]. In contrast, from a business perspective, we indicate that adopting IFRS 16 will not result in significant changes in the financial ratios, except for an increase in the debt-to-equity ratio in the trade and services sector. Nevertheless, it may be important information for auditors performing financial analyses as part of a financial audit.

The survey has certain limitations. First, the DID method assumes that no time-varying factors affect the indices under examination. However, this assumption is not fully met in the case of WSE companies. Additionally, the analysis covered data 1 year before and 1 year after the IFRS 16 standard came into force. Indeed, its results would have been more accurate if the investigation had covered 2 years or more before and after, which was impossible due to the shock of the coronavirus pandemic. Furthermore, quantitative research could be extended by conducting qualitative research, e.g., case studies on selected companies from various industries. This way, it would be possible to learn holistically about the conditions in which companies operate, apply regulations, and measure achievements.