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Assessing the impact of operating lease capitalization with dynamic Monte Carlo simulation

Author

Listed:
  • Giner, Begoña
  • Merello, Paloma
  • Pardo, Francisca

Abstract

The European Commission has recently adopted a new accounting standard for leases that will be implemented in 2019, which requires operating lease contracts to be included in the balance sheet, affecting key ratios, leverage and profitability. We simulate the impact of IFRS 16 using Monte Carlo method, which incorporates the uncertainty of the future value of variables when making predictions. Unlike prior studies based on historical data, our study considers a five-year forecast horizon and, more importantly, contemplates several probable scenarios. Based on the STOXX All Europe 100, our results confirm that, in 2019, liability maturity, liquidity and return on assets will decrease, leverage and return on equity will increase, but the figures do not change substantially after 2019. The results of this dynamic approach are consistent across the five scenarios considered; however, the impact of IFRS 16 is smoothed under the strategy of reducing the life of lease contracts.

Suggested Citation

  • Giner, Begoña & Merello, Paloma & Pardo, Francisca, 2019. "Assessing the impact of operating lease capitalization with dynamic Monte Carlo simulation," Journal of Business Research, Elsevier, vol. 101(C), pages 836-845.
    • Handle: RePEc:eee:jbrese:v:101:y:2019:i:c:p:836-845
    DOI: 10.1016/j.jbusres.2018.11.049
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    Citations

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    Cited by:

    1. Gerasimos Rompotis & Dimitris Balios, 2023. "The Impact of IFRS 16 On the Financials of The Greek Listed Companies," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 22(3), pages 375-407, September.
    2. Elizabeth Devos & Erik Devos & He Li & Desmond Tsang, 2022. "Operating Lease as Alternative Financing for REITs: a Viable Strategy or a Sign of Trouble?," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 153-180, August.
    3. Nafiz Fahad & Tom Scott, 2022. "The Impact of Lessee and Lessor Accounting in Local Councils," Australian Accounting Review, CPA Australia, vol. 32(3), pages 388-395, September.
    4. Nafiz Fahad & Tom Scott, 2022. "The Effect of Capitalising Operating Leases On Charities," Australian Accounting Review, CPA Australia, vol. 32(1), pages 141-148, March.
    5. Sehrish Atif & Shehzad Ahmed & Muhammad Wasim & Bassam Zeb & Zeeshan Pervez & Lorraine Quinn, 2021. "Towards a Conceptual Development of Industry 4.0, Servitisation, and Circular Economy: A Systematic Literature Review," Sustainability, MDPI, vol. 13(11), pages 1-27, June.

    More about this item

    Keywords

    IFRS 16; Operating leases; Monte Carlo simulation; European Union;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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