Management Practice Insights

Abstract

Problem of Practice:

Since 2016, accounting boards worldwide have advocated for greater lease accounting transparency. However, it was not until 2019 that the implementation of new lease accounting standards, IFRS 16/Ind AS 116 (Indian standard), brought significant changes for companies. These changes have had far-reaching implications, affecting various parameters used to analyse corporate financial performance. A key question arises: 'How can companies effectively incorporate the new lease accounting standards to ensure compliance while minimizing financial and operational disruptions?'

According to research by Ciao-Wei Chen, Maria Correia and Oktay Urcan, the adoption of these standards has macro- and micro-level implications that companies must navigate carefully.¹ At the company level, Chief Financial Officers (CFOs) and Chief Operating Officers (COOs) must reassess their operating assets and liabilities, as the new regulations limit the headroom for additional debt on balance sheets. These changes require organizations to implement strategic adjustments, enhance data management processes and improve internal coordination to meet compliance requirements, while ensuring business continuity. On a macro level, policymakers must recognize that compliance with these standards reduces financial flexibility, potentially impacting capital expenditures and debt management strategies