How IFRS 16 Capitalisation Affects Firm Performance through Financial Leverage

International Financial Reporting Standard 16 (IFRS 16) (adopted as MFRS 16 for Malaysia) scrapped the current operating lease accounting framework and instead companies must account for right-of-use (ROU) assets and related lease liabilities on the balance sheet. The standard-setting bodies had hoped to boost transparency and comparability, but the required capitalisation creates a foreseeable surge in reported corporate financial leverage, with a critical question remaining on how this leverage change, because of the accounting standards, will indirectly affect multi-dimensional firm performance. To fill this gap, the objective of this research is to create an integrative conceptual model with a mediating variable in between IFRS 16 lease capitalization intensity and the post-IFRS 16 firm performance, which is measured by traditional profit indicators, capital investment efficiency and general market indicators. Thematic analysis approach was used to synthesize the empirical evidence in the narrative review methodology that was used in this study, which gathered 35 articles from the peer-reviewed literature in the Scopus database. The results show that capitalization under IFRS 16 first of all leads to a mechanical rise in the calculated debt ratios and short-term profitability measures such as Return on Assets (ROA) are initially compressed, while financial leverage acts as a double-action mediator. This leverage transparency helps lower information processing costs for external stakeholders, curbs managerial over-investment and improves the perception of corporate governance, leading to an increase in capital allocation efficiency and better ESG valuations in the long term. Theoretically, this study expands upon positive accounting theory by considering debt escalation as an active signaling mechanism instead of a passive distorting signal, and it offers practical value for corporate managers dealing with debt covenants and analysts assessing structural risk.

IFRS 16, MFRS 16, Financial Leverage, Firm Performance, Mediating Effect, Narrative Review

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