IFRS 16 vs ASC 842: How Leases Change EBITDA and Enterprise Value

If you're prepping for interviews, there's a good chance someone will ask: "How do leases affect EBITDA and EV, and does it matter if the company reports under IFRS or US GAAP?"

Short answer: under IFRS 16, almost all lease costs move below EBITDA, so EBITDA goes up. Under ASC 842, operating lease costs stay inside EBITDA, so EBITDA barely changes. That means you have to treat lease liabilities differently in EV depending on the standard, or your multiples will be wrong.

Let's walk through it with real numbers so you can explain it cleanly in an interview.

The Background in 60 Seconds

Both standards took effect around 2019 and share one big idea: leases now go on the balance sheet.

• IFRS 16 (used across Europe and much of the world) became effective for periods starting January 1, 2019.
• ASC 842 (US GAAP) became effective for public companies with fiscal years starting after December 15, 2018. Private companies adopted it later, for fiscal years starting after December 15, 2021.

Before these rules, operating leases were mostly off balance sheet. You'd just see a rent expense in the income statement. Now, under both standards, a lessee records:

• A right-of-use (ROU) asset
• A lease liability, equal to the present value of future lease payments

So far, the two standards agree. The difference shows up in the income statement, and that's where EBITDA gets affected.

The Key Difference: One Model vs Two Models

IFRS 16: A Single Model

IFRS 16 treats basically every lease like a financing arrangement. The lease cost is split into two pieces:

• Depreciation of the ROU asset (below EBITDA)
• Interest on the lease liability (below EBIT)

Rent no longer hits operating expenses. Result: EBITDA increases.

There are two optional exemptions: short-term leases (12 months or less) and low-value assets (think laptops or small office equipment). Companies using these exemptions can keep expensing those payments the old way.

ASC 842: A Dual Model

US GAAP keeps two categories:

• Finance leases: treated like IFRS 16, with depreciation and interest. These costs sit below EBITDA.
• Operating leases: the asset and liability go on the balance sheet, but the income statement shows a single straight-line lease cost inside operating expenses.

Most real estate leases (offices, stores, warehouses) end up as operating leases. Result: for most US companies, EBITDA looks about the same as it did before the new standard.

ASC 842 has a short-term lease exemption (12 months or less) but no low-value exemption.

Quick Comparison

A Worked Example

Let's take one company and run it through both standards.

Assumptions:

• Revenue: 1,000
• Operating costs excluding rent: 700
• Other D&A (on owned assets): 50
• One lease: 5 years, 100 per year, paid at year-end
• Discount rate: 5%

Lease liability at inception = 100 × 5-year annuity factor at 5% (4.3295) = ≈ 432.9

Under IFRS 16, Year 1 lease charges are:

• Depreciation: 432.9 / 5 = 86.6
• Interest: 432.9 × 5% = 21.6
• Total: 108.2 (more than the 100 of rent, because IFRS 16 front-loads the expense)

Income Statement, Year 1

Same company, same cash rent, but EBITDA is 50% higher under IFRS 16. EBIT is a bit higher too, while pre-tax income is lower in Year 1.

Over the full 5-year lease, total expense is identical under both standards (500). IFRS 16 just pushes more of it into the early years because interest is highest when the liability is largest.

Why This Matters for EV/EBITDA

Here's the golden rule of valuation multiples:

The numerator and denominator must be consistent. If a cost is excluded from EBITDA, the matching obligation must be included in EV.

Under IFRS 16, rent has been pulled out of EBITDA and turned into "depreciation + interest," which is exactly how debt behaves. So the lease liability should be treated like debt in EV.

Under ASC 842 operating leases, rent is still inside EBITDA. Adding the lease liability to EV would double count the lease.

Plugging in Numbers

Say our company has an equity value of 1,500 and financial net debt of 300.

ASC 842 basis:

• EV = 1,500 + 300 = 1,800
• EV / EBITDA = 1,800 / 200 = 9.0x

IFRS 16 basis (done right):

• EV = 1,500 + 300 + 432.9 = 2,232.9
• EV / EBITDA = 2,232.9 / 300 = 7.4x

Now the mistakes:

• IFRS 16 EBITDA, but forget the lease liability: 1,800 / 300 = 6.0x (looks way too cheap)
• Lease liability in EV, but use ASC 842 EBITDA: 2,232.9 / 200 = 11.2x (looks way too expensive)

The wrong combinations swing the multiple from 6.0x to 11.2x for the exact same business. That's the kind of error that can sink a comps analysis.

Wait, Why Are the "Correct" Multiples Still Different?

Good catch, and it's a great point to raise in an interview. Even done consistently, you get 9.0x vs 7.4x.

That's because the lease piece carries a much lower implied multiple: 432.9 of liability against 100 of rent is about 4.3x. Blending that into the overall company drags the IFRS 16 multiple down.

The takeaway: you can't put a US GAAP company's EV/EBITDA next to an IFRS company's EV/EBITDA and compare them directly, even if each is internally consistent. You need to put every comp on the same basis.

How Bankers Fix It in Practice

When your comps set mixes IFRS and US GAAP companies, pick one basis and adjust everyone to it.

Option 1: Convert Everyone to a "Pre-IFRS 16" Basis

This is common in practice because it mirrors how US companies with mostly operating leases already look.

• Subtract lease costs from IFRS 16 EBITDA (roughly, the depreciation and interest on leases, or the cash lease payments)
• Remove lease liabilities from EV

Some European companies make this easier by reporting a metric like "EBITDA after leases" (EBITDAaL) or a "pre-IFRS 16" EBITDA in their investor materials. Telecom groups are known for this.

Option 2: Convert Everyone to a "Post-IFRS 16" Basis

• Add operating lease cost back to US GAAP EBITDA
• Add operating lease liabilities to EV

This works, but it means digging through US footnotes for operating lease cost and liability figures. Doable, just more manual.

Practical Tips

• Always check the footnotes. Lease disclosures tell you the lease liability, the lease cost and the split between operating and finance leases.
• Watch for finance leases under US GAAP. Those liabilities are already debt-like and belong in EV, just like regular borrowings.
• Be consistent across the whole model. Comps, precedent transactions and your DCF should all use the same treatment.
• Label your basis clearly. Write "EV/EBITDA (pre-IFRS 16)" or similar on your output so nobody misreads it.

Don't Forget Leverage and Cash Flow

Leverage Ratios

Back to our example:

• ASC 842: Net debt / EBITDA = 300 / 200 = 1.5x
• IFRS 16: (300 + 432.9) / 300 = 2.4x

Same company, very different leverage headline. That's why credit analysts and lenders pay close attention to which basis is being used, and why many loan agreements spell out exactly how leases are treated in covenant definitions.

Cash Flow Statement

The actual cash paid is identical, but where it shows up changes:

• IFRS 16: the principal portion of lease payments goes to financing cash flow. Interest can go in operating or financing depending on the company's policy. Either way, cash flow from operations goes up.
• ASC 842 operating leases: the full payment stays in operating cash flow.
• ASC 842 finance leases: principal goes to financing, interest goes to operating.

In our example, IFRS 16 CFO would be higher by 78.4 (100 minus 21.6 of interest) if interest stays in operating, or by the full 100 if interest is classified as financing.

DCF Implications

If you build an unlevered DCF off IFRS 16 numbers, your free cash flow excludes lease payments, so it's higher. To stay consistent, you must subtract the lease liability when going from EV to equity value. Skip that step and you'll overvalue the equity.

How to Answer This in an Interview

If you get asked "How do IFRS 16 and ASC 842 affect EBITDA and EV?", here's a tight answer:

1. Both standards put leases on the balance sheet as an ROU asset and a lease liability.
2. IFRS 16 uses one model: lease cost becomes depreciation plus interest, so EBITDA rises.
3. ASC 842 has two models: finance leases work like IFRS 16, but operating leases keep a single lease cost inside EBITDA, so EBITDA is mostly unchanged.
4. For consistency, include lease liabilities in EV when using IFRS 16 EBITDA, and exclude operating lease liabilities when using ASC 842 EBITDA.
5. Comparing across standards requires adjusting all comps to one basis, because even consistent multiples differ.

Bonus points if you mention that IFRS 16 front-loads total expense, lowering net income in early lease years, and that leverage ratios look higher under IFRS 16.

The Bottom Line

The new lease standards didn't change how much rent a company pays. They changed where that cost shows up, and that ripples straight into EBITDA, EV and every multiple built on them.

Remember the one rule that ties it all together: whatever you take out of EBITDA, you put into EV. Nail that, walk through a quick example like the one above and you'll handle this question better than most candidates in the room.