PFRS 16 Compliance

Abstract

IFRS 16 addresses the criticisms against IAS 17 that allowed lessees not to recognize assets and liabilities related to operating leases. This study analyzed the impact of operating lease capitalization on 38 selected Philippine-listed companies' key financial ratios from the service sector from 2016 - 2021 under PFRS 16. Key financial ratios were calculated and compared to the changes that happened due to the adoption of PFRS 16 – Leases with firm size, firm age, inflation rate, nominal GDP growth rate and the unemployment rate as moderating variables. Mann-Whitney U Test was employed to analyze the impact of pre-and post-PFRS implementation on financial ratios. The impact of predictor variables on PFRS 16 and key financial ratios were examined using Ordinary Least Squares (OLS) regression analysis. The study result revealed a significant negative influence of PFRS 16 implementation on return on equity, price-earnings ratio, and price-to-book ratio; and a significant positive influence on the debt-equity ratio, and earnings per share. Firm age positively moderates the return on equity and PFRS 16 adoption (p = 0.032). Only the nominal GDP growth rate moderates the key financial ratio and PFRS 16 in terms of the price-earnings ratio (p = 0.019). This implies that PFRS 16 adoption significantly influences some key financial ratios. Management should reconsider their business model, especially on lease transactions, as it will impact their financial reporting. The new accounting standards must be well communicated to stakeholders considering the firm-level and macroeconomic indices for better decision making.