The Effect of International Financial Reporting Standards Accounting for Leases 16 on Financial Reporting Quality of Companies Listed in the Nairobi Securities Exchange

Abstract

The study examines the effect of the adoption of International Financial Reporting Standards Accounting for Leases (IFRS 16) on the quality of financial reporting of Kenyan listed firms. The research considered other variables in determining the effect. Included in the model as control variables are profitability, liquidity, leverage and firm size. The research takes a quantitative approach where quantitative data was collected and analyzed. The response variable, Financial Reporting Quality (FRQ) is measured using the quantitative approach developed by Nijmegen Center for Economics (NICE). FRQ metrics with 33 components make the response variable, whereas company-specific characteristics of leverage, firm size, profitability, liquidity and IFRS 16 adoption make up the predictor variables. A dummy variable measures IFRS 16 adoption is with value 0 before adoption and 1 after adoption era. The researcher derived data used for the study from the yearly issued statements of entities trading at the NSE for the accounting years 2017-2020. Period 2017 & 2018 represent pre-adoption period while year 2019 & 2020 represents the post-adoption period. The researcher analyzed the data via means of descriptive statistics, correlation analysis, analysis of variance, as well as panel regression analysis. Only IFRS 16 adoption was statistically significant in explaining the quality of financial reporting of quoted entities in Kenya. The study results show that, IFRS 16 adoption enhances the quality of firms’ financial reports. Scholars, investors, managers, policymakers, and regulators could use these findings to enhance financial reporting.