Navigating IFRS 16: Lease Accounting Impact on Valuation

Why IFRS 16 Changed Valuation Forever

The introduction of IFRS 16 fundamentally altered how companies account for leases. By bringing most leases onto the balance sheet, IFRS 16 increased transparency—but also added complexity for finance teams and valuation professionals.

For businesses in the UK and Australia, IFRS 16 has had a direct impact on:

• EBITDA
• Balance sheet leverage
• Cash flow presentation
• Enterprise valuation

Understanding IFRS 16 valuation implications is now essential for CFOs, investors, and professionals delivering business valuation services.

What Is IFRS 16?

IFRS 16 is the accounting standard that governs lease recognition, measurement, and disclosure.

Under IFRS 16:

• Lessees recognise a right-of-use (ROU) asset
• A corresponding lease liability is recorded on the balance sheet

This removes the operating vs finance lease distinction for lessees and directly affects valuation inputs.

Why IFRS 16 Matters for Valuation

The changes introduced by IFRS 16 directly influence key valuation drivers, including:

• Earnings metrics
• Capital structure
• Cash flow classification

As a result, IFRS 16 valuation requires careful adjustment and alignment across valuation and financial reporting frameworks to ensure accuracy and comparability.

Impact of IFRS 16 on Key Valuation Metrics

1. EBITDA Inflation

Under IFRS 16:

• Operating lease expenses are removed
• Depreciation and interest replace lease costs

This typically results in higher EBITDA, which can distort valuation multiples if not normalised—especially in market multiple valuations.

2. Increased Enterprise Value Components

Lease liabilities are now recognised as debt-like obligations, affecting:

• Net debt calculations
• Enterprise value (EV) reconciliation

Failure to adjust for lease liabilities can materially overstate equity value.

3. Cash Flow Presentation Changes

Operating cash flows improve, while financing cash flows increase due to lease payments—directly affecting DCF model inputs and discount rate consistency.

IFRS 16 Valuation Challenges

Comparability Issues

Comparing:

• Pre-IFRS 16 vs post-IFRS 16 periods
• IFRS vs non-IFRS reporters

requires careful normalisation to avoid misleading valuation conclusions.

Judgement in Discount Rates

Lease discount rates influence:

• ROU asset values
• Lease liability measurement

Small changes in assumptions can materially impact valuation outcomes.

Data Quality & Assumptions

Incomplete lease data or inconsistent assumptions weaken valuation reliability and audit defensibility.

Adjusting Valuation Models for IFRS 16

Discounted Cash Flow (DCF) Models

Valuers must ensure:

• Lease payments are treated consistently
• Cash flows align with discount rate assumptions
• Lease liabilities are not double-counted

Market Multiple Valuations

When applying EBITDA multiples:

• Ensure consistency between numerator and denominator
• Adjust peer group metrics where required

This is critical for comparability across sectors.

Enterprise Value Reconciliation

Lease liabilities should be treated alongside traditional debt when bridging enterprise value to equity value—consistent with professional valuation standards.

Use Cases: How IFRS 16 Impacts Valuation in Practice

Use Case 1: M&A Transaction Valuation

In acquisitions, IFRS 16 affects:

• EBITDA normalisation
• Net debt adjustments
• Purchase price negotiations

Failure to align buyer and seller treatment of lease liabilities often leads to valuation disputes.

Use Case 2: Impairment Testing & Financial Reporting

Companies performing impairment testing must:

• Align cash flows with lease-adjusted discount rates
• Ensure ROU assets and liabilities are consistently reflected

This is especially relevant for goodwill and CGU valuations.

Use Case 3: Debt Covenant & Financing Analysis

IFRS 16 can:

• Inflate EBITDA-based covenant metrics
• Increase reported leverage

Valuation models must reflect lender-specific adjustments to avoid covenant misinterpretation.

Use Case 4: Sector-Specific Valuation (Retail & Hospitality)

Lease-heavy sectors require:

• Detailed lease portfolio analysis
• Consistent treatment across valuation methods

Minor inconsistencies can lead to significant valuation swings.

Checklist: Preparing for IFRS 16-Adjusted Valuation

Before undertaking an IFRS 16-impacted valuation, ensure:

• ✅ Complete lease register with terms and discount rates
• ✅ Clear reconciliation of lease liabilities to reported debt
• ✅ Normalised EBITDA for valuation purposes
• ✅ Consistent cash flow treatment across models
• ✅ Peer group metrics adjusted for IFRS 16 where required
• ✅ Alignment between accounting and valuation assumptions
• ✅ Transparent documentation of judgements and estimates
• ✅ Audit-ready working papers

This checklist significantly reduces valuation risk and review comments.

Best Practices for IFRS 16 Valuation

1. Normalise Financials

Adjust historical and forecast financials to ensure comparability.

2. Treat Lease Liabilities Consistently

Apply consistent treatment across DCF, multiples, and EV reconciliation.

3. Maintain Transparent Documentation

Clearly document assumptions, judgements, and methodologies.

4. Collaborate Across Teams

Coordination between accounting, treasury, and valuation teams improves accuracy.

Industries Most Impacted by IFRS 16 Valuation

IFRS 16 valuation effects are particularly significant in:

• Retail
• Hospitality
• Aviation
• Logistics
• Real estate-intensive businesses

These sectors often carry material lease obligations that materially influence enterprise value.

How Synpact Consulting Supports IFRS 16 Valuation

Synpact Consulting supports IFRS 16 valuation through:

• Lease-adjusted valuation services
• DCF and market multiple normalisation
• Audit-ready valuation documentation
• Support for transactions, reporting, and impairment testing

Our approach ensures IFRS 16 enhances transparency without distorting value.

Conclusion: IFRS 16 Requires Valuation Discipline

IFRS 16 has improved balance sheet transparency—but it has also raised the bar for valuation accuracy.

A disciplined approach to IFRS 16 valuation ensures stakeholders understand the true economic impact of leases and make informed decisions based on consistent, defensible outcomes. FRS 16 valuation ensures stakeholders understand the true economic impact of leases and make informed decisions based on consistent, defensible valuation outcomes.

Frequently Asked Questions (FAQ) on IFRS 16 Valuation

Need help navigating IFRS 16 valuation impacts?

Speak with Synpact Consulting for lease-adjusted, audit-ready valuation support.