Module II· DCF — Mechanics & FCFIntermediate
Question
How do IFRS 16 lease obligations affect the DCF?
Answer
Mechanics
Since IFRS 16 (2019), operating leases are capitalized as right-of-use assets and lease liabilities are recognized on the balance sheet.
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Consequence
EBITDA rises (no more operating-lease expense), D&A rises (right-of-use depreciation), interest rises (the lease interest). In the DCF: lease liabilities count toward net debt — otherwise you overstate the equity value. Capex definition: lease payments are a cash outflow, but under IFRS they sit in financing cash flows (repayment of the lease liability).
Local GAAP
operating leases stay off-balance-sheet — at middle-market companies often a large hidden liability that only becomes visible in the notes.