What is local GAAP vs IFRS, and why does it matter in an LBO?
Local GAAP (a country's domestic accounting standard) is often more conservative and creditor-oriented, while IFRS is the international, more market-oriented standard used by listed companies.
Why relevant for LBOs? Mid-market companies usually report under local GAAP, but international buyers and lenders expect IFRS figures. Net debt under IFRS is typically 30–50% higher than under local GAAP — mainly because of pension obligations and operating leases (IFRS 16 capitalizes all leases over 12 months).
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| Aspect | Local GAAP | IFRS |
|---|---|---|
| Goodwill | scheduled amortization (e.g. max 10 years) | impairment test only |
| Pensions | smoothed multi-year discount rate | current market rate (IAS 19) |
| Leases | operating leases off-balance-sheet | IFRS 16 capitalizes all >12m |
| Inventory | LIFO sometimes permitted | FIFO or weighted average |
| Item | Local GAAP | IFRS |
|---|---|---|
| Reported EBITDA | $38m | $45m (leases out of OpEx) |
| Net debt + pensions | $220m | $295m (higher DBO) |
| + IFRS 16 lease liability | – | +$40m |
| Effective leverage | 5.8x | 7.4x |
The sponsor must show a clear local-GAAP-to-IFRS bridge in the model — otherwise leverage is computed inconsistently.
Question: "Which accounting standard do you use?"
Answer: "Local GAAP is the source from domestic reporting, but the LBO analysis runs on IFRS. Net debt under IFRS is typically 30–50% higher, mainly from pensions and IFRS 16. A clean bridge belongs in every IC memo, or you carry pricing risk."