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Impact of IFRS 16 on financial ratios

The aim of this paper is to research the impact that changes of International financial reporting standard 16 have on financial ratios. International financial reporting standard (IFRS) 16 –“Leases” brings significantly different approach on presenting lease liabilities. It is implemented as of January, 1st 2019 and is mandatory for all companies which apply IFRS in their financial reporting. Following reporting requirements of this standard all leases have to be presented in full in financial statements including those leases that were previously considered as “operating lease”. Operating lease was previously presented only as operating expense in the amount of yearly lease expense with no other influence on balance sheet. With the new requirements those leases also have to be fully (discounted value of future payments) presented within balance sheet, leading to increase of lease assets and financial liabilities. Consequently, higher total assets and financial liabilities will influence Balance sheet financial ratios, especially leverage ratios. Implementation of IFRS 16 also affects Profit and loss account considering that lease assets will now be depreciated and will bring interest expense. Those changes will lead to changes in profitability ratios, especially on EBITDA level.

IFRS 16, lease, operating lease, financial ratios

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