My article last week triggered some animated discussion about the implications of the new IFRS 16 lease accounting rules.
The company under discussion was small cap packaging group Macfarlane, whose reported net debt on Stockopedia has risen from £13.3m to £44.8m in six months. This was largely due to the new rules, not to a big increase in borrowing.Small cap editor Paul Scott also gave his verdict on the IFRS 16 rules last week, generating a very lively comment thread.
Why the excitement?
Animated discussion and lease accounting aren’t usually words you’ll find in the same sentence. But IFRS 16 seems to have given rise to some strong views on both sides of the fence.
One of the points raised by subscriber Gromley in both my piece and Paul’s was that IFRS 16 is likely to cause disruption to anyone who uses stock screens and algorithms to pick shares.
The Macfarlane example above shows why. In many cases, IFRS 16 accounts will show a significant increase in reported net debt, even when actual debt is unchanged. (I’ll explain why in a moment.)
I use a stock screen to select shares…
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