Bringing Operating Leases onto the Balance Sheet: How IFRS 16 and U.S. GAAP Changed Reported Leverage in Lease-Intensive Industries
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Businesses were able to retain the majority of their operating leases—rent contracts—off the balance sheet until 2019. This was altered by IFRS 16 and its U.S. GAAP equivalent, which mandated that businesses record future lease payments as a liability. In this analysis, I quantify the extent to which this shift raised the reported debt of businesses. In addition to a control group of businesses that lease relatively little, I gathered data from the first annual reports issued under the new regulations by 24 major U.S.-listed corporations in the retail, airline, and restaurant industries. I contrasted each company's reported ratios with what it would have displayed in the absence of the new regulations. The new regulations increased these balance sheets' lease liabilities by almost USD 134 billion. The debt-to-equity ratio rose by a median of 12.9% and the liabilities-to-assets ratio by an average of 5.8 percentage points for the 19 companies with positive equity, and all of them reported higher leverage. For businesses that lease little, the effect was almost nonexistent, but for Chipotle, it reached 273%. The impact increases with a company's leasing volume. Leverage ratios and loan covenants should be modified for the new standard by lenders and analysts, particularly in businesses that heavily rely on leases.
Keywords
Financial Leverage, Financial Ratios, Financial Reporting, Ifrs 16, Leases, U.s. Gaap