IFRS 16 leases

IFRS 16 (effective 1 January 2019) requires lessees to recognize most leases on the balance sheet as a right-of-use (ROU) asset and a corresponding lease liability, eliminating the distinction between operating and finance leases for lessees. Before IFRS 16, operating leases were "off balance sheet" — lease payments were expensed in EBIT, and the liability was disclosed in the notes. Under IFRS 16, both the asset (discounted at the incremental borrowing rate) and the liability (present value of future lease payments) are on the balance sheet, fundamentally changing the P&L presentation: depreciation of the ROU asset replaces the operating lease expense, and interest on the lease liability appears below EBIT.

In a business valuation and M&A context, IFRS 16 has three key implications: (1) EBITDA increases because the operating lease expense is replaced by depreciation (above EBITDA) and interest (below EBIT) — companies that previously paid high operating lease rentals show materially higher EBITDA post-IFRS 16; (2) Net debt increases by the lease liability — meaning the enterprise-to-equity bridge must include the lease liability as a debt-like item; (3) Enterprise value multiples (EV/EBITDA) are incomparable before and after IFRS 16 unless restated. All of these require careful normalization in due diligences.

For Swiss GAAP (Swiss GAAP FER) companies, IFRS 16 does not apply — Swiss GAAP maintains the finance/operating lease distinction. This creates a significant comparability issue between IFRS-compliant and Swiss GAAP companies in the same sector, requiring explicit lease normalization in any cross-border valuation or multiple analysis.

At Hectelion, we normalize IFRS 16 impacts in our due diligences and apply consistent lease treatment in our Franco-Swiss valuations.