What would be the impact of changing models for measuring market risk on banks' regulatory capital?
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The objective of this study is not to present in detail the mechanisms of the IFRS 16 standard but to understand the strategic contribution that accounting standards can represent for companies. In order to do so, the study uses the IFRS 16 as a basis, first presenting it in a synthetic overview, then how it is applied, and finally, what are the strategic challenges resulting from it.
The IFRS 16 standard is linked to the accounting for rentals in the company’s financial statements. It answers to a need of making the tenant and owner companies comparable. More concretely, it allows the balance sheet to account for the companies’ simple rentals as well as for financial leases.
Concerning the income statement, IFRS 16 allowsthe breakdown of rental charges between depreciation charges and interest charges.
This standard disrupts financial analysis practices. As a matter of fact, many indicators are impacted by this standard. Let us take the example of the Saint Gobain company.
after applying the standard to calculations related to it, the EBITDA increased by 78 million euros and operating profit by 85 million euros.
Following this positive impact, Saint Gobain’s share price rose by 2%. This is a clear example of the weight and importance that a "simple" standard can have for businesses. In addition, the IFRS 16 standard implies an increase of debt ratios. Companies will have to rely on their financial communication to allow experts to understand these changes. Thus, we can notice that beyond its accounting aspect, it is the financial engineering which is at the core of this dynamic.
As a result of these changes, both investment policies and business strategies can be changed. Is it more profitable for a company to abandon renting entities or to continue doing so? The decision will be made based on operational, financial but also organizational factors. Due to its consequences on financial ratios and indicators, the studied standard also affects the salary compensation policy through profit sharing. The influence of IFRS 16 can affect all factors of production.
In conclusion, IFRS 16 is not limited to its normative contribution. This new standard affects capital and label factors and influences the core ofa company’s activity. A broader observation of the IFRS 16, particularly on the tax aspect or on shareholder compensation, would allow a more global vision of the influence that it has, in order to put in place a strategy. The financial engineering professions will be at the heart of this change by assimilating the challenges of this standard and by exploiting its potential to benefit the company.