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About this book

This book presents an empirical analysis on how the new lease accounting model of IFRS 16 affects financial statements and performance of Italian companies. It discusses the theoretical framework of the off-balance sheet financing with a particular focus on the off-balance sheet lease contracts. Previous research provided controversial results about the potential impacts on the companies’ financial statement and performance deriving from leases capitalization. The application of different methodological approaches based on estimation of the expected effects resulted in inconclusive results. This book aims to measure the real impacts deriving from the post-implementation of the new lease accounting standard (IFRS 16) on companies’ financial statements, economic and financial performance, on market reactions and on financial statement’ users.

Table of Contents


Chapter 1. Introduction

Financial communication provided by companies disclosing relevant information about their financial situation is considered one of the most relevant factors in reducing the cost of capital and it plays an important role in informing investors about its financial conditions (Wang 2013). With the aim of providing clearer and transparent information and in order to ensure financial statements comparability, companies adopt same accounting rules. In this regard, Meeks and Meeks (2001) introduced the concept of “accounting regulation” referring to financial accounting standards and auditing/assurance principles.
Elisa Raoli

Chapter 2. Lease Accounting Framework and the Development of International Accounting Standards

Lease is defined as a transaction between the owner of a property (lessor), who grants the use of that property to a third party (lessee), for a certain period of time defined in the contract, with the option for the lessee to acquire the good, return or to extend the contract (Niyama and Silva 2013). The legal framework proposes two kinds of lease agreement: the finance lease is usually used for the acquisition of property, plant, and equipment, while the operating lease is usually used to acquire assets for a shorter period of time and, in this case, the lessee simply uses this asset (typically equipment or property) until he gives it away. In this second case, the title related to the asset is not transferred to the lessee during or after the lease period, unlike in the finance lease where the lessee has the control over the asset as all risks and rewards related to the leased asset pass to the lessee (Revsine et al. 2017). The two different kinds of leases present several benefits and drawbacks that will be discussed in depth in the next paragraphs.
Elisa Raoli

Chapter 3. Lease Accounting Literature Review and Hypotheses Development

The reasons driving companies to use accounting standards are also related to benefits resulting for managers and shareholders. In this regard, Watts and Zimmerman have proposed the Positive Accounting Theory, useful theory to explain the use of accounting standards (Watts and Zimmerman 1978, 1979, 1986). In fact, the authors of the Positive Accounting Theory claim that “management plays a central role in the determination of standards” and “one function of financial reporting is to constrain management to act in the shareholders’ interest,” thereby, this theory became an academic theory which helps in explaining and predicting practices in accounting. This theoretical framework highlighted also how the importance of adopting new and good accounting standards, specifically for large companies, can help to solve classic problems related to the agency theory (i.e., problems related to the difference in interests between shareholders and managers). In this context, Brown (2011) states that “accounting standards are important in a well-developed capital market because they help to resolve a serious agency problem. Insiders (managers) are better informed than outsiders (shareholders) about their firms’ investment opportunities, how hard they, the managers, will work and the perks they will consume and how well the firm is doing overall.” Therefore, uniform accounting and auditing standards are necessary because they are a relatively low-cost solution to a serious agency problem and providing clear and transparent information within the financial statements, allowing the interests of managers to be aligned to those of shareholders. Indeed, the issuance of new accounting standards should take into consideration all of these aspects: better quality information (more accurate, comprehensive, and timely financial statement information); the minor difference in the knowledge of information between small investors and professionals (adverse selection); greater comparability, eliminating many international differences in accounting standards and standardizing reporting formats (Ball 2006; Brown 2011). According to Ball (2006), higher-quality information “should reduce both the risk to all investors from owing shares and the risk to less-informed investors due to adverse selection. In theory, it should lead to a reduction in firms’ cost of equity capital.
Elisa Raoli

Chapter 4. Post-Implementation Analysis of IFRS 16 on Companies’ Financial Structure, Economic and Financial Performance

This chapter illustrates the methodology used to develop the empirical analysis and the related results. In line with the existing literature presented in the previous Chap. 3, the empirical analysis has been conducted on three main research lines. The first, related to the definition of the relationship between companies’ determinants (explanatory variables) and the level of lease liability emerging in the financial statement following the adoption of the new IFES 16. The second, relating to the analysis of the impact deriving from the implementation of the new lease accounting model on the financial structure and on economic-financial performance. The third, relating to the investigation conducted on the implementation of the new accounting standard and the reactions of market operators, with a particular focus on market value. As already outlined, the innovativeness of the empirical analysis lies in the adoption of real data extrapolated from the financial statements that incorporate the transition from the previous IAS 17 to the new IFRS 16. The adoption of such data and, at the same time, the effect of the First Time Adoption (FTA) mainly described in the related notes, allow to contribute to the existing literature providing real results on the effect deriving from the implementation of the new lease accounting model.
Elisa Raoli


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