Department of Business and Management Master Degree in Management Chair: Financial Reporting and Performance Measurements IFRS 16: the impact of lease accounting on the GEDI Group Performance Supervisor Candidate Prof. Elisa Raoli Chiara Liberati 712281 Co-Supervisor Prof. Riccardo Tiscini ACADEMIC YEAR 2019-2020 Table of Contents INTRODUCTION ............................................................................................................................................. 6 CHAPTER 1 ...................................................................................................................................................... 8 1. Lease contracts ........................................................................................................................................ 8 2. Regulatory Evolution and background: from IAS 17 to IFRS 16 ........................................................ 10 3. Normative Process of IFRS 16 ............................................................................................................. 11 4. IAS 17 ................................................................................................................................................... 12 4.1. Operating lease .............................................................................................................................. 12 4.2. Financial lease ............................................................................................................................... 13 4.3. Critics with IAS 17 ........................................................................................................................ 14 5. IFRS 16 ................................................................................................................................................. 15 5.1. Introduction and goal ..................................................................................................................... 15 5.2. Capitalisation model ...................................................................................................................... 17 5.3. Reasons for the adoption of IFRS 16 ............................................................................................ 18 5.4. Lessor Accounting ......................................................................................................................... 19 5.5. Non-lease components .................................................................................................................. 19 5.6. Exceptions ..................................................................................................................................... 20 5.7. Transition options .......................................................................................................................... 22 5.8. Discount rate .................................................................................................................................. 24 5.9. Individual leases ............................................................................................................................ 28 5.10. Group Leases ................................................................................................................................. 29 CHAPTER 2 .................................................................................................................................................... 30 1. Costs vs. Benefits (Effect Analysis) ..................................................................................................... 30 1.1. Implementation Costs .................................................................................................................... 30 1.2. Critics to IFRS 16 .......................................................................................................................... 32 1.3. IASB response to the main concerns ............................................................................................. 33 2. Implications on Balance Sheet .............................................................................................................. 34 3. Implications on Income Statement ....................................................................................................... 34 4. Implications on Cash Flow Statement .................................................................................................. 36 5. Implications on Financial Statement Notes .......................................................................................... 36 6. Implications on Financial Ratios .......................................................................................................... 37 6.1. Leverage ........................................................................................................................................ 37 6.2. Asset Turnover .............................................................................................................................. 37 6.3. ROA ............................................................................................................................................... 38 6.4. Interest Expense ............................................................................................................................ 38 6.5. Depreciation Expense .................................................................................................................... 38 2 6.6. Rental Expense .............................................................................................................................. 38 6.7. EBITDA and Profit Margin ........................................................................................................... 38 6.8. EBIT .............................................................................................................................................. 39 6.9. EBITDAR ...................................................................................................................................... 39 7. Implications on Net Financial Position ................................................................................................. 39 8. Implications on Taxes ........................................................................................................................... 40 9. Implications on Covenants ................................................................................................................... 40 10. Credit Risk Assessment .................................................................................................................... 40 11. Effects on the leasing market ............................................................................................................ 41 12. Advantages of IFRS 16 ..................................................................................................................... 41 12.1. Comparability ................................................................................................................................ 41 12.2. Quality of Information ................................................................................................................... 43 13. Main differences between IFRS 16 and FASB on Leases ................................................................ 45 14. Comparison between IFRS 16 and IAS 17 ....................................................................................... 47 15. IFRS 16 and Covid-19 ...................................................................................................................... 49 CHAPTER 3 .................................................................................................................................................... 51 1. GEDI Gruppo Editoriale: firm, main events, performance .................................................................. 51 2. Analysis of Consolidated Financial Statements 31.12.2018 and 31.12.2019 ....................................... 55 3. Process of first application of IFRS 16 ................................................................................................. 61 4. Performance Analysis ........................................................................................................................... 67 4.1. Profitability Analysis ..................................................................................................................... 70 4.2. Liquidity Analysis ......................................................................................................................... 72 5. Fundamental Analysis .......................................................................................................................... 74 6. Interview to the CFO ............................................................................................................................ 82 6.1 Analysis pre-implementation ............................................................................................................. 85 6.2 Main difficulties in the application of IFRS 16 .................................................................................. 87 6.3 Main benefits derived from the application ....................................................................................... 88 CONCLUSION...............................................................................................................................................