Module IV· Cash FlowAdvanced
Question
How do you treat operating leases under IFRS 16 in an LBO model?
Answer
Mechanics
IFRS 16 (mandatory since 2019) capitalizes ALL leases > 12 months on the balance sheet — both the right-of-use asset (ROU) and the lease liability.
Deep diveShow more details
Example
A middle-market company with $50m of real-estate lease commitments over 10 years, 5% discount rate.
| Item | Local GAAP (old) | IFRS 16 (new) |
|---|---|---|
| Lease on balance sheet | no (operating lease) | yes (ROU + liability ~$38m) |
| P&L treatment | lease expense (operating) | D&A + interest expense split |
| EBITDA | lower | higher (lease expense drops out of OpEx) |
| Cash Flow | unchanged | unchanged |
Impact in the LBO
- EBITDA inflation: IFRS 16 EBITDA is 5-15% higher than historical comparatives
- Net debt definition: the lease liability is often counted as "debt-like" → the true leverage ratio
- Banks: many lenders exclude IFRS 16 effects in covenants ("frozen GAAP")
Common pitfalls
- Taking an EBITDA multiple straight from IFRS 16 numbers without a bridge to the pre-IFRS-16 figure
- Forgetting to include the lease liability in net debt → wrong equity purchase price
- In comparables analysis: older transactions are pre-IFRS-16, newer ones post — apples-to-oranges
Pitch tip
Question: "How do you treat IFRS 16 in your model?"
Answer: "Clarify explicitly whether EBITDA is pre- or post-IFRS-16; net debt including the lease liability; multiples used consistently"