THE IMPACT OF THE ADOPTION OF IFRS 16 - LEASES ON THE READABILITY OF FINANCIAL REPORTS

In January 2016, the International Accounting Standards Board (IASB) introduced International Financial Reporting Standard (IFRS) 16, which came into effect on January 1, 2019. This standard brings substantial changes to the accounting of leases from the lessee's perspective, replacing the previous International Accounting Standard (IAS) 17. Its primary goal is to enhance transparency and comparability across financial statements. IFRS 16 introduces a capitalisation model for most leases, requiring companies to recognise lease assets and lease liabilities on the Statement of Financial Position, effectively eliminating the distinction between "finance" and "operating" leases, from the lessee perspective. Hence, this study investigates if this change in accounting standard made the notes in the annual reports of FTSE 100 companies more complex, and secondly, the determinants influencing the readability of annual reports in their notes. Given the importance of transparent financial communication for stakeholders, the readability of these reports has emerged as a critical aspect of corporate governance. This research aims to identify the factors that significantly affect the readability of annual reports, focusing on both qualitative and quantitative attributes, such as company lease liabilities, net income, size, industry, profitability, and the use of complex language. The analysis is conducted using readability metrics such as the Gunning Fog Index, Flesch Reading Ease, Flesch-Kincaid Grade Level and SMOG Index Readability Score. Statistical regression models are employed to assess the relationship between the identified determinants and the readability. Regarding the readability of the notes, the findings indicate that there’s no statistical significance between the means, therefore the complexity of the text remained the same. Regarding the statistical model, it was found that annual reports with lenghtier notes became mores complex. The study highlights the need for companies to balance their notes to the statements of financial position with clear and accessible communication, especially as corporate governance increasingly emphasizes the importance of transparency and readability in financial reporting.