IFRS 16 Leases and Net Debt in Transaction Services
How IFRS 16 affects net debt and EBITDA in Transaction Services: the mechanics, the consistency rule and how to handle it in a deal context.
IFRS 16 has been in effect since January 2019, but it continues to generate confusion in Transaction Services interviews and in live deals. The logic is actually quite clean — the challenge is applying it consistently.
What IFRS 16 does
Before IFRS 16, a simple operating lease (e.g. an office or a fleet of vehicles) appeared only in the P&L as a rental expense, reducing EBITDA.
Under IFRS 16, the same lease is capitalised onto the balance sheet:
- A right-of-use (ROU) asset is created on the asset side.
- A lease liability is created on the liability side (the present value of future lease payments).
In the P&L, the rental expense is replaced by:
- Depreciation of the ROU asset (below EBITDA line).
- Interest on the lease liability (also below EBITDA line).
Net effect on EBITDA: EBITDA goes up, because the rental charge that previously reduced it has been removed. The lease cost has been moved below the EBITDA line.
The consistency rule in Transaction Services
This is the critical point that interviewers test:
If you're using a post-IFRS 16 EBITDA as your valuation base (i.e. leases are not deducted from EBITDA), then lease liabilities must be included in net debt. The higher EBITDA and higher net debt offset each other — the equity value is unchanged vs the pre-IFRS 16 basis.
If you're using a pre-IFRS 16 EBITDA (i.e. leases are deducted from EBITDA, as was the norm before 2019), then lease liabilities should not be in net debt. Mixing a post-IFRS 16 EBITDA with a net debt figure that excludes lease liabilities would overstate equity value.
The rule: whichever basis you use for EBITDA, the net debt calculation must be consistent with it.
Why this matters in practice
When benchmarking against transaction multiples from pre-2019, you're comparing a post-IFRS 16 EBITDA (higher) with a pre-IFRS 16 EBITDA (lower). This creates a comparability distortion. A business that looks like it's valued at "6x EBITDA" on a post-IFRS 16 basis might actually represent "7x EBITDA" on the older basis — a significant difference in deal context.
Practical impact size
The lease liability impact depends on the lease-intensity of the business. A retail business or restaurant chain with many sites could have a lease liability representing 40-60% of EV. An asset-light services business might have lease liabilities of only 5-10% of EV.
What to say in the interview
"IFRS 16 increases EBITDA by removing the rental charge, but creates a lease liability that enters net debt. The two effects offset in the EV/Equity bridge — provided you're consistent. The issue arises when comparing multiples across different periods or accounting frameworks."
The programme covers IFRS 16 in the context of real case studies with multi-year data sets, including periods straddling the 2019 adoption date.