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IFRS 16 leases and its effects on management compensation systems in the Norwegian retail industry

Baastad, Mathias Sjølie; Aslaksen, Andreas Berg
Master thesis
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1752894.pdf (2.905Mb)
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http://hdl.handle.net/11250/2479265
Utgivelsesdato
2017
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Samlinger
  • Master of Science [963]
Sammendrag
The background for this master thesis is the upcoming leasing standard issued by

International Accounting Standards Board, IFRS 16 Leases. The standard will

require lessees to recognize substantially all lease arrangements on the balance

sheet. The current standard has been criticized for its binary classification,

allowing lessees to keep certain leased assets off-balance sheet. IFRS 16 will have

an effective date of 1 January 2019, and is deemed to have great impact on

leasing-intensive industries.

We examine how IFRS 16 will impact key ratios for companies applying IFRS,

and consequently whether this will have any possible effects on bonus

compensation contracts for Norwegian retail companies. After we present the

relevant literature regarding lease accounting and management incentives and

bonus contracts, we conduct a case study to analyze IFRS 16’s impact on the

financial statements of two of the largest retail companies in Norway. The results

are used to analyze the effect on identified elements in bonus contracts obtained

from literature and sit-downs with executives of the case companies. This analysis

includes a historical and a forward-looking approach. Succeeding interviews with

auditors enlighten the topics from a professional perspective.

When capitalizing operating leases, we find evidence suggesting a significant rise

in operational measures included in bonus contracts (EBITDA, EBIT, NOPAT),

while included financial measures (ROIC, ROCE, EVA) are likely to decline

notably. However, IFRS 16 appears to have a diminishing effect on growth in

ROIC/EVA when comparing different growth scenarios in a forward-looking

approach. Interviewed experts claim that making bonus contracts more robust can

lead to circumvention of any possible impact from future changes in accounting

policies. To ease the transition, the experts state that acquisition of new ITsystems

and possession of sufficient technical knowledge will be critical for

estimating an accurate present value of all future lease payments.
Beskrivelse
Masteroppgave(MSc) in Master of Science in Business, Business law, tax and accounting - Handelshøyskolen BI, 2017
Utgiver
BI Norwegian Business School

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