IFRS 16 Lease Adjustments in Quality of Earnings
How IFRS 16 affects EBITDA, net debt and QoE analysis in M&A transactions. What FDD analysts need to know and how interviewers test it.
IFRS 16, the lease accounting standard adopted across most major jurisdictions since 2019, fundamentally changed how leases appear in financial statements — and consequently how FDD analysts treat them. It is a frequent topic in TS interviews, and a poor answer on IFRS 16 can undermine an otherwise strong candidate.
What IFRS 16 Changed
Under the old IAS 17 framework, most leases were classified as operating leases and expensed directly through the P&L as rent. Under IFRS 16:
- Almost all leases must be recognised on the balance sheet as a right-of-use (ROU) asset and a corresponding lease liability
- The P&L now shows depreciation on the ROU asset and interest on the lease liability, rather than a single rent line
- EBITDA increases because the rent expense disappears and is replaced by depreciation (which sits below EBITDA) and interest (which also sits below EBITDA)
The Impact on EBITDA
The mechanical effect of IFRS 16 is an uplift to EBITDA equal to the old rent expense. For a company with €2m of operating lease costs previously running through the P&L, EBITDA will increase by approximately €2m under IFRS 16.
This has significant valuation implications. At a 10x multiple, €2m of additional EBITDA adds €20m to enterprise value — even though the underlying cash economics of the business have not changed at all.
The FDD Treatment
Pre-IFRS 16 Comparatives
When building the EBITDA bridge across multiple years, analysts must ensure consistent treatment. If the company transitioned to IFRS 16 mid-period, the prior-year figures need to be restated — or the adjusted EBITDA clearly labelled as "pre-IFRS 16" or "post-IFRS 16."
IFRS 16 EBITDA Adjustment
In many TS engagements, advisers present EBITDA both:
- Including IFRS 16: As reported under the current standard
- Excluding IFRS 16 (IAS 17 equivalent): To allow comparability with businesses that have not yet adopted it, or to align with how debt covenants are measured
Impact on Net Debt
The IFRS 16 lease liability now appears on the balance sheet and is typically included in the net debt calculation. This partially offsets the EV uplift from higher EBITDA — but not always exactly, depending on the discount rate used and the lease term.
How Interviewers Test This
Common interview questions include:
- "What is the impact of IFRS 16 on EBITDA?"
- "If a company has €3m of rent previously under IAS 17, what happens to EV when it adopts IFRS 16?"
- "How do you adjust EBITDA for IFRS 16 in a QoE report?"
The best answers combine the accounting mechanics with commercial awareness — explaining not just the "what" but the "so what" for a buyer or seller in a transaction.
Practical Tips for FDD Analysts
- Always check whether the company presents its accounts under IFRS 16 and from which date
- Review the lease schedule (note disclosures) to understand the size and duration of lease liabilities
- Be aware that small companies or those applying GAAP may not be subject to IFRS 16
Conclusion
IFRS 16 is not just an accounting technicality — it affects valuation, net debt, and deal economics in a material way. FDD analysts who understand it deeply can add real value in a transaction.
The Transaction Services Interview Programme (€119.99, one-time) covers IFRS 16 and all major accounting adjustments with worked examples and case studies. Get access today.