Module I· Lease Accounting (IFRS 16 vs. HGB)Intermediate
Question
How does IFRS 16 affect operating cash flow?
Answer
Mechanics
IFRS 16 moves lease cash outflows from operating cash flow into financing cash flow, which is a major issue for cash-flow comparisons.
- Pre-IFRS-16: Lease payments, for example 100 p.a., are fully in OCF as paid rent expense and reduce OCF by the full amount.
- Post-IFRS-16 split:
- Principal repayment of the lease liability goes into financing cash flow.
- The interest component has a classification choice under IFRS: OCF or financing CF. Many companies show interest in OCF.
Deep diveShow more details
Consequence
OCF increases by the principal portion of the lease cash payment, often ~80% for a 5-year lease.
Example — lease payment 100 p.a. (interest 20, principal 80)
| Effect | Pre-IFRS-16 | Post-IFRS-16 |
|---|---|---|
| OCF | -100 | -20 (interest only, if shown in OCF) |
| Financing CF | — | -80 (principal repayment) |
| Total FCF | -100 | -100 (unchanged) |
Important for FCF conversion analysis
Show 'reported FCF before leases' and 'FCF after leases' separately. Otherwise lease-heavy businesses such as retail and aviation look artificially better.
Pitch tip
Document the FCF definition explicitly. Standard IB convention since 2019 is FCF including lease principal repayment, which restores comparability to the pre-IFRS-16 FCF definition.