Finance lease

A finance lease (or capital lease) is a lease arrangement under which the lessee assumes substantially all the risks and rewards of ownership of an asset, without holding legal title. In financial due diligence, finance lease liabilities are integrated into the financial debt definition under the cash-free / debt-free convention, directly reducing the equity value paid to selling shareholders.

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Under IFRS 16, effective from 1 January 2019, lessees must recognise virtually all material leases on the balance sheet as a right-of-use (ROU) asset and a corresponding lease liability, eliminating the former operating/finance lease distinction. The implications for business valuation are significant: EBITDA increases (rent is reclassified as depreciation plus interest), net debt increases, while EBIT is largely unaffected, and cross-company comparisons require attention to adoption dates and practical expedients. On the balance sheet, this creates a structural increase in total assets and liabilities, reducing equity ratios: for lease-intensive businesses (retail chains, hotel groups, logistics operators), debt/equity ratios may double and covenants based on net debt must be adapted, so the analysis must separate the IFRS 16 impact from underlying financial indebtedness.

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Example: a Swiss SME operates three machine tools under finance leases totalling CHF 2.4 million over 5 years; the right-of-use asset is CHF 2.1 million and the lease liability CHF 2.4 million, included in net debt at closing and reducing the equity value paid to the seller by CHF 2.4 million. A Swiss retailer reports EBITDA of CHF 12.0 million under IFRS 16 versus CHF 7.0 million under IAS 17 (CHF 5.0 million of rent reclassified), but the CHF 28.0 million of lease liabilities treated as debt in the EV bridge largely offset the uplift. A hotel group with CHF 45.0 million of total debt (CHF 28.0 million IFRS 16 lease liabilities, CHF 17.0 million bank debt) shows true leverage of 2.4x versus apparent leverage of 3.6x, a critical distinction for refinancing capacity and covenant compliance.

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Hectelion systematically restates finance leases under IFRS 16 in every valuation and due diligence, separating lease liabilities from financial debt to give acquirers an accurate view of leverage and debt capacity.