The Effects of New Accounting Standards on Firm Value: The K-IFRS 1116 Lease

Hae Jin Chung ()
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Hae Jin Chung: School of Business, Sejong University, 209 Neungdong-ro, Gwangjin-gu, Seoul 05006, Korea

IJFS, 2022, vol. 10, issue 3, 1-14

Abstract: We examine how the implementation of the K-IFRS No.1116 Lease affects firm value. This new accounting standard mandates capitalization of all leases, resulting in changes in the key accounting leverage ratios and rates of return. The contracting costs hypothesis suggests that changes in accounting techniques have economic consequences because lending contracts are expressed in terms of accounting numbers. We find that capitalizing operating leases, which were off-balance-sheet transactions prior to K-1116 implementation, increases the lease liabilities-to-assets ratio and lease liabilities-to-debt ratio significantly. While a firm’s business fundamentals do not change with the K-1116, we show that the value of firms that use high levels of operating leases decreased with the implementation of K-1116. The declines in firm value are significant for the subgroups of firms that are likely to raise external financing, suggesting that the implementation of K-1116 increased the level of financing frictions and decreased the value of future investment opportunities.

Keywords: lease; K-IFRS 1116; IFRS 16; lease capitalization; accounting standards; contracting costs hypothesis (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
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