Module I· Lease Accounting (IFRS 16 vs. HGB)Advanced
Question
How do you model IFRS 16 in a carve-out where leases between parent and subsidiary are restructured?
Answer
Carve-out standard
The sold subsidiary often uses group real estate such as headquarters or a plant site. In a carve-out, a new lease has to be set up and IFRS 16 mechanics apply.
- Pre-carve-out: The group owns the real estate as PP&E on its balance sheet; the subsidiary pays an internal charge and does not recognize a lease.
- Carve-out: Buyer and seller negotiate a new 5-15 year lease agreement.
- Seller: Property remains PP&E; the new lease with the subsidiary is an operating lease from the lessor side, producing rental income.
- Buyer / sold subsidiary: The new lease is recognized under IFRS 16 as RoU asset + lease liability, materially changing the stand-alone balance sheet.
Deep diveShow more details
Buyer valuation effects:
- Balance sheet expands by RoU asset and lease liability, often 5-15% of total assets.
- EBITDA rises because rent becomes D&A + interest instead of rent expense.
- Net debt rises by the lease liability.
- Real-estate lease terms are often not at market levels, so validating market rent is a key DD workstream.
Pitch tip
In a carve-out involving group real estate, model the new lease in the PPA layer. Lease liabilities can easily be $50-150m for larger targets, and equity valuation often recognizes 50-100% of the lease liability as a valuation adjustment.