The superseded International Accounting Standard for Leases (IAS 17) allows many long-term leases of substantial amounts to be classified as operating leases which need not be recognised on the balance sheet. Effectively, this provides flexibility to companies to use operating leases to undertake fixed cost capital expenditures. Given that balance sheets do not reflect operating leases which are long-term, non-cancellable and of a significant amount, some may consider that this does not give a fair representation of a company’s financial position. This contentious issue may be rectified by the recently issued International Financial Reporting Standard for leases (IFRS 16), which requires all long-term leases to be recognised as leased assets and leased liabilities. This method may considerably influence the financial performance and position of a company. So far, limited research has been conducted to analyse the impact of IFRS 16 on financial statements and value relevance. This research attempts to fill this gap in the literature. By refining the constructive method (Imhoff, Lipe and Wright, 1991), we capitalise operating leases according to the notion of the ‘right-of-use’ method introduced in the newly issued IFRS 16. While the findings regarding the impact of capitalising leases are interesting, the methodology improvements to capitalise operating leases also provide a healthy contribution to the literature. Past studies capitalise operating leases by assuming the lease commitments after fifth year incurred equally. In this study, Imhoff et al.’s (1991) constructive method is improved further so that the present value of lease commitments after the fifth year are more precisely estimated. We allocate the disclosed lump sum lease commitments after the fifth year following the widely accepted assumption that lease commitments are reduced progressively and apply unique discount rates (Branswijck, Longueville and Everaert, 2011; Fülbier, Silva & Pferdehirt, 2008) for each firm after considering the incremental borrowing rate which is suggested in IFRS 16. This study provides the first Australia evidence of the impact of IFRS 16 on financial statements. We find significant changes on financial position and key financial ratios when operating leases are capitalised. In addition, the change on book value of equity as a result of capitalising operating leases is value relevant. However, the changes of current earnings do not materially affect the current market value. Given the current lack of full disclosure of lease commitments in the financial statement, this study supports the ‘right-of-use’ method employed in IFRS 16 to reflect operating leases on balance sheet. The paper is structured as follows: section 2 provides background information about the development of the Australian accounting standard for leases. This is followed by a literature review in section 3 that covers methods of capitalising operating leases and value relevance studies. Section 4 and 5 describes the hypotheses and methodology used in this study. Analysis and results are presented in section 6. Section 7 concludes with a summary of findings, limitations and opportunities for further research.