How does IFRS 16 affect EBITDA? How to perform a "true" EBITDA analysis for CFOs.

IFRS 16 typically increases EBITDA because operating lease expenses are no longer recorded in OPEX but are replaced by depreciation of rights-of-use assets (ROU assets) and interest on leased debt – two items that are below EBITDA. However, a "better" EBITDA does not necessarily mean better business performance: cash flow remains unchanged, net profit at the beginning of the period may decrease, and ratios such as EV/EBITDA or Net Debt/EBITDA may be distorted.

This article helps CFOs and FP&A understand IFRS 16 How does this affect EBITDA?Why does EBITDA increase when IFRS 16 is implemented, and how can EBITDA under IFRS 16 be analyzed in a neutral and manageable manner?

Does IFRS 16 increase EBITDA, and does this increase truly reflect efficiency?

IFRS 16 This often leads to an increase in EBITDA.Because operating lease expenses are no longer recorded in OPEX as before, but are separated into different categories. depreciation of right-of-use assets (ROU assets) and lease liabilityBoth of these items fall below EBITDA, so they do not reduce this ratio.

However, that increase was mainly accounting reclassification (OPEX reclassification), but it doesn't generate additional cash flow or substantially improve operational efficiency.

Does IFRS 16 increase EBITDA, and does this increase truly reflect efficiency?

In most cases, IFRS 16 actually increases EBITDA. However, this increase mainly stems from changes in accounting treatment, rather than from improved business performance or increased cash flow.

Prior to IFRS 16, operating lease expenses were accounted for in OPEX, i.e., operating expenses. Because OPEX sits above EBITDA in the income statement, each dollar of lease paid directly reduces EBITDA.

Following the adoption of IFRS 16, most lease agreements are no longer recognized as pure lease expenses. Instead, businesses must recognize them as follows:

• Right of Use Asset (ROU asset – asset granting the right to use a leased asset)
• Lease liability (the obligation to pay rent)

The rental cost is no longer included in OPEX, but is now split into two parts:

• Depreciation of assets based on the right to use (Depreciation – the cost of allocating assets over time)
• Interest expense on lease debt

Both of these items are below EBITDA. Therefore, when rental costs move away from OPEX, EBITDA will increase mechanically.

Accounting mechanisms that cause EBITDA to increase

In terms of formula:

EBIT = Revenue − OPEX − Depreciation
EBITDA = EBIT + Depreciation

When lease costs are included in OPEX, EBITDA is directly reduced. When IFRS 16 transfers lease costs to depreciation and interest, EBITDA is no longer affected by that fixed lease payment.

Therefore, the increase in EBITDA can be summarized as follows:

ΔEBITDA is approximately equal to the fixed rent previously included in OPEX, minus any rent expenses still to be recognized in OPEX (if any).

However, this is only true if the previous lease agreement was recorded entirely as a traditional operating lease.

EBITDA increased, but cash flow remained unchanged.

This is the most important point that CFOs need to consider when analyzing how IFRS 16 affects EBITDA.

EBITDA is a measure of operating performance before depreciation and financial costs. It does not reflect actual lease payment obligations.

Even though EBITDA increased, the company still had to pay lease payments under the contract. Cash outflows remained unchanged simply because the accounting presentation changed. The lease debt still existed on the balance sheet. The payment obligation remained the same.

Therefore, an increase in EBITDA does not necessarily mean an improvement in profit margins or better cash generation. Looking solely at this metric without understanding the underlying mechanisms, businesses may misjudge the quality of their earnings.

When does EBITDA fail to increase fully?

Not every instance of applying IFRS 16 will maximize EBITDA growth.

There are three common scenarios that can cause the increase to slow down:

First, there are variable lease payments (rent payments that depend on revenue, output, or price indices). These are often still recognized as operating expenses, thus still reducing EBITDA.

Secondly, there are the non-lease service components (e.g., maintenance fees, management services). If considered separately, these are still considered OPEX.

Thirdly, there are exceptions such as short-term leases or low-value assets. These contracts are not capitalized but continue to be recognized as direct costs.

Therefore, the actual increase in EBITDA depends on the lease structure and how expenses are categorized.

"Increased technical skills" and the risk of inflated KPIs.

Most market research simply concludes that "IFRS 16 increases EBITDA." However, it's crucial to emphasize that this increase is technical due to cost reclassification, not an intrinsic improvement in the business model.

If a business uses EBITDA to calculate management bonuses, evaluate unit performance, or compare with competitors, failing to build an EBITDA bridge (a reconciliation statement before and after IFRS 16) can easily lead to inaccurate assessments.

A "better" EBITDA may simply be the result of new accounting standards, not a better strategy.

The role of operational data in true analytics.

In reality, the biggest challenge lies not in the formula, but in the data. Rental costs may be mixed with service fees. Recurring invoices may not be linked to contract codes. Payments may be out of sync.

If data is not standardized, businesses can easily miscalculate EBITDA growth or misunderstand the impact of IFRS 16.

One practical approach is:

• Standardize the rental expense category to clearly separate fixed rent and ancillary services.
• Collect all invoices and attach them to each rental contract.
• Reconcile payment schedules with obligations recorded on the balance sheet.

When the actual cash flow paid is clearly reconciled with the accounting obligation, the CFO can then confirm that the increase in EBITDA is merely a presentational change, not an economic change.

Once this mechanism is understood, the next step is to analyze the differences between EBITDA, EBIT, and net profit after IFRS 16 to avoid misinterpreting the quality of earnings.

How have EBITDA, EBIT, and net profit changed after the adoption of IFRS 16?

When analyzing how IFRS 16 affects EBITDA, many people simply conclude that EBITDA has increased. However, without comparing EBITDA with EBIT and net profit (profit after tax), CFOs can easily misjudge the quality of earnings.

After the adoption of IFRS 16, these three indicators did not move in the same direction and did not have the same meaning.

1. Mapping income statements before and after IFRS 16

Prior to IFRS 16:

• Rent expenses are included in OPEX.
• Rent expenses reduce both EBITDA and EBIT.
• There are no rental-related interest expenses on the income statement.

Following IFRS 16:

• Rent expense exits OPEX
• Instead:
  • Depreciation of right-of-use assets (ROU – right-of-use assets)
  • Interest on lease liability

Depreciation reduces EBIT but does not reduce EBITDA.
Interest expenses reduce pre-tax profit and net profit, but do not affect EBITDA.

So:

• EBITDA typically increases.
• EBIT may decrease slightly or change insignificantly.
• Net profit typically decreases in the initial stages.

2. Why does net profit often decrease in the early stages?

The core issue lies in the "front-loading" mechanism (the high cost effect at the beginning of the period).

According to the effective interest method (a method of calculating interest based on the actual outstanding balance), interest expense is calculated as follows:

Interest_t = r × Lease liability_{t-1}

In there:

• r is the discount rate (usually the additional borrowing rate – IBR).
• Lease liability_{t-1} is the beginning lease balance.

Because the largest lease debt is at the beginning of the period, interest expenses are higher in the first year than in subsequent years.

Depreciation is typically allocated using a straight-line method:

Depreciation_t ≈ ROU / Lease term

The total rental-related costs on the P&L each year are:

Total lease cost_t = Dep_t + Interest_t

In the early years, these total costs are often higher than the actual rent paid (cash rent). Therefore, even if EBITDA increases, net profit may decrease due to the larger portion of interest expense than before.

Later, as lease debt gradually decreases, interest expenses fall, the total cost of leases on P&L becomes lower than cash rent, and net profit tends to improve.

3. Compare the trends of each indicator.

EBITDA (Earnings before interest, taxes, and depreciation)
The increase is due to operating expenses (OPEX). This is a change that constitutes an accounting reclassification.

EBIT (Earnings Before Interest and Taxes)
It is still reduced by ROU depreciation. Therefore, EBIT does not increase as sharply as EBITDA, and may even decrease if total costs (Dep + Interest) are higher than the old rent.

Net Profit
Profits are easily reduced in the early stages due to high borrowing costs (front-loading effect). This is why many businesses applying IFRS 16 record lower profits in the first year even though EBITDA increases.

4. Impact on loan and covenant indices

This change in cost structure has a direct impact on:

Interest coverage ratio
Common recipe:

Interest Coverage = EBITDA / Interest expense

Following IFRS 16:

• EBITDA increased
• Interest expenses also increased (due to interest on leased debt).

Depending on the loan contract structure, this ratio can improve or worsen. If the loan contract defines "Interest" to include rental interest, then an increase in the denominator could put pressure on the loan.

Additionally, covenants such as Net Debt/EBITDA also change due to:

• Net debt increases (because lease liability is treated as a debt).
• EBITDA increased

The net impact depends on the definition in the loan agreement. This is why CFOs cannot look at EBITDA in isolation but must simultaneously consider EBITDA – EBIT – Net Profit – Leverage.

5. Management perspective: Why is this important?

Many analyses simply conclude that "EBITDA is increasing." However, for the CFO, the more important question is:

• Is bonus management linked to EBITDA?
• Does Covenant's borrowing practices follow the new accounting standards or Frozen GAAP (which maintains the old standards)?
• Do investors understand the front-loading effect?

Without clear explanation, businesses may face three risks:

1. Management bonuses increased even though economic performance remained unchanged.
2. The decline in net profit is causing negative misunderstanding.
3. Covenant is being tightened due to changes in the definition of Debt.

6. Practical methods for correctly interpreting data.

To accurately analyze the impact of IFRS 16, CFOs need two parallel streams of data:

• Accounting data according to IFRS 16 (Reported)
• Cash-based management data

In practice, rental data is often scattered across recurring invoices, lease agreements, and accounts payable.

A reasonable control process might include:

• Compile a series of monthly/quarterly "cash rent" records from actual invoices and payments.
• Compare the cash rent with the payment schedule in the contract to identify any discrepancies (cut-offs) or additional fees.
• Export standard data for the FP&A department to generate parallel reports: IFRS 16 (accounting) and cash-based (management).

With these two perspectives, the CFO can clearly explain to the Board of Directors and investors that the increase in EBITDA is due to a change in standards, while the decrease in opening net profit is due to front-loading.

When does IFRS 16 NOT increase EBITDA?

EBITDA does not always increase to its maximum potential after IFRS 16. The actual increase depends on the lease structure and how expenses are classified.

There are four important groups of factors.

1. Fixed and variable payments

Fixed lease payments
This portion is typically capitalized into ROU and lease liability. Since this portion leaves OPEX, it increases EBITDA.

Variable lease payments
If rent is dependent on revenue, output, or the CPI index, in many cases it is still recognized as OPEX. This still reduces EBITDA.

2. Non-lease service component

In many contracts, the rent includes maintenance, management, and operation services. If separated, the service component (non-lease component) is usually still recorded in OPEX.

Therefore, EBITDA did not increase entirely by the amount shown on the lease invoice.

3. Exemption from short-term leases and low-value properties.

IFRS 16 allows for the application of exemptions:

• Short-term lease (≤ 12 months, no right to purchase)
• Low-value assets

These items are typically recorded as direct costs in OPEX, not capitalized. Therefore, this further reduces EBITDA.

4. Framework formula for estimating “Actual EBITDA uplift”

The estimated actual increase in EBITDA is as follows:

ΔEBITDA ≈ Cash Rent_fixed
− OPEX_variable
− OPEX_non-lease
− OPEX_exemptions

This formula helps CFOs avoid the "illusion" that all previous rent payments will automatically translate into increased EBITDA.

5. Commonly Overlooked Points in Market Analysis

Many articles simply state that IFRS 16 increases EBITDA without clearly differentiating which items remain within EBITDA.

In practice, to bridge correctly, businesses need to:

• Classification of fixed rent
• Identify variable payments
• Separate the accompanying services.
• Review of exemptions

Without this step, the EBITDA bridge would be flawed from the start.

6. Control the classification to avoid bridge mismatches.

At the operational level, misclassification of rental costs is the biggest cause of skewed analysis.

A practical approach:

• Standardize rental expense categories: clearly separate "fixed rent," "variable rent," "additional services," and "additional fees."
• Automatically read recurring invoices and suggest categorization by supplier and contract terms.
• The consolidated report, broken down by expense group, allows FP&A to know exactly what remains in EBITDA.

Knowing the exact reasonable increase, the new CFO can construct a standard EBITDA bridge and compare before and after IFRS 16 or between businesses with different lease structures.

Once the "reasonable increase" has been determined, the next step is to build a benchmark EBITDA Bridge to ensure consistent comparability across periods and across businesses.

How to build an EBITDA Bridge before and after IFRS 16

When IFRS 16 changes EBITDA, the issue isn't about the increase or decrease, but about comparability. If not properly constructed... EBITDA bridge (EBITDA adjustment bridge), businesses can easily fall into the following situation:

• Comparison of discrepancies before and after the implementation of IFRS 16
• Comparison of discrepancies between businesses that have adopted IFRS and those that have not.
• Incorrect valuation when using EV/EBITDA
• Misreading the terms in a loan agreement (covenants)

The EBITDA bridge is therefore not just an "Excel file for the sake of having one," but rather a tool to standardize accounting language to a common economic level.

1. Three versions of KPIs that CFOs need to clearly distinguish.

To build a proper bridge, you first need to understand which version of EBITDA you are working with.

(1) Reported EBITDA (EBITDA according to IFRS 16)

This is EBITDA presented according to current accounting standards, after operating lease expenses have been reclassified as:

• Depreciation of Right of Use (ROU)
• Interest on lease debt

Reported EBITDA accurately reflects accounting standards, but is no longer directly comparable to periods prior to IFRS 16.

(2) Adjusted EBITDA (equivalent version prior to IFRS 16)

The goal of this version is to bring EBITDA back to a state similar to when there was still rent in OPEX.

Common adjustment formula:

Adjusted EBITDA
Reported EBITDA
− (ROU depreciation + Lease interest)

• Cash Rent equivalent

Important Note:

• If cash rent no longer appears on the P&L due to IFRS 16, you must "add back" the actual rental cash flow to bring the EBITDA back to its previous rental-based state.
• This adjustment is intended for comparison over time (pre/post IFRS 16).

(3) EBITDAR

EBITDAR is an abbreviation for:

Profit before interest, taxes, depreciation, and rent.

General formula:

EBITDAR = EBITDA + Rent expense

In the context of IFRS 16, rent expense can be understood as “cash rent equivalent” or the portion of previous fixed rent.

EBITDAR is particularly useful in high-rent-intensity industries such as retail, logistics, and aviation – where different “lease or own” structures can distort EBITDA.

2. Adjustments must be aligned with the comparison objective.

A common mistake is using a single formula for all purposes. In reality, each objective requires a different logic bridge.

(a) Comparison over time (before and after IFRS 16)

Objective: To see if operational efficiency actually changes.
Solution: Adjust EBITDA to cash-rent comparable.

(b) Comparison with competitors

If your competitor hasn't adopted IFRS 16 or is using a different standard, you have two options:

• Adjust your EBITDA back to its previous form.
• Or use EBITDAR for both sides.

It is important to ensure comparability (comparable).

(c) Valuation and covenants

When analyzing EV/EBITDA or Net Debt/EBITDA, the following need to be normalized:

• EBITDA
• And EV (Enterprise Value)

EV can include lease liabilities. If EBITDA increases but EV also increases due to lease liabilities, the valuation ratio may be distorted.

In loan agreements, many banks apply the "frozen GAAP" principle (maintaining the accounting standards at the time of signing the contract). If the covenant is calculated according to the old standards, the CFO needs to adjust the bridge to the logic before IFRS 16.

3. Mandatory sanity checks

A good EBITDA bridge is not just about the formula, it has to be... construction (compare).

(1) Compare actual payment

Compare:

Cash paid
z
Fluctuations in accounts payable for lease

If the actual payments don't match the contract payment schedule, the bridge may be at fault with the cut-off or classification.

(2) Roll-forward ROU and lease debt

A tracking table needs to be created:

Opening balance

• New generation
  - Principal payment
  = Ending balance

If the roll-forward doesn't align with the interest and depreciation schedules, the bridge will be unsustainable at audit.

(3) Check the logic of increasing - decreasing by year

The total rental cost according to P&L (Dep + Interest) must reflect the front-loading effect:
High at the beginning of the period, gradually decreasing later.

If the cost line is "flat," the business may be using the wrong accounting method.

4. Differences in approach

Many articles only provide a general adjustment formula. However, adjusting EBITDA must be linked to:

• Internal management objectives
• Pricing objectives
• Compliance goal

These three objectives do not share a common bridge.

A bridge, in its true nature, should:

• Clearly define the purpose.
• Consistent adjustment
• There is a reconciliation of documents and cash flow.

5. Practical implementation methods to reduce errors

In practice, data serving the bridge is often scattered among:

• Recurring rental invoice
• Contract
• Payment schedule
• Accounts Payable

To build an accurate bridge, businesses need:

1. Extract cash rent by provider, contract, and payment period.
2. Attach the lease contract code to each invoice and related expense.
3. Synchronize this data to the FP&A system to create a parallel dashboard:
   • Reported EBITDA
   • Adjusted EBITDA
   • EBITDAR

When data is standardized right from the transaction level (invoices – expenses – accounts payable), building an EBITDA bridge no longer depends entirely on manual Excel work.

After understanding how to construct a bridge and conduct proper checks, the next step is to illustrate with specific numerical examples before and after IFRS 16 to clearly show the actual level of "EBITDA uplift".

Example of calculating EBITDA before and after IFRS 16.

To illustrate how IFRS 16 affects EBITDA, let's assume a simple lease agreement:

• Rental: 500 million VND/year
• Lease term: 5 years
• Payment at the end of each year
• Discount rate (IBR – the additional interest rate a business must pay if it borrows money to purchase an equivalent asset): 8%/year
• There are no variable leases and no separate service components.

Let's assume that before accounting for rental costs, the business has:

• Revenue: 10 billion
• Other operating expenses (excluding rent): 8 billion
• Depreciation of other assets: 500 million

1. Scenario 1: According to IAS 17/VAS (Operating lease)

Under the old standard, the entire 500 million in rent was recorded as an operating expense (OPEX).

Recipe:

EBITDA = EBIT_before_rent − Rent

We have:

EBITDA = (10 − 8) − 0.5
EBITDA = 2 billion - 0.5 billion
EBITDA = 1.5 billion

EBIT after depreciation of 500 million:

EBIT = 1.5 − 0.5
= 1 billion

Here, the cost of rent directly reduces both EBITDA and EBIT.

2. Scenario 2: According to IFRS 16

Step 1: Calculate the Present Value (PV)

According to IFRS 16, businesses must recognize:

• Right of Use (ROU) asset
• Lease liability

Both are calculated based on the present value of the rental cash flow:

PV = Σ [Payment_t / (1+r)^t]

With Payment = 500 million
r = 8%
n = 5 years

PV approximately 1.996 billion VND.

Therefore:

ROU ≈ 1.996 billion
Lease liability ≈ 1,996 billion

(Assuming there are no rental incentives or upfront costs.)

Step 2: Calculate depreciation and interest for year 1.

Depreciation (using the straight-line method):

Dep_1 = ROU / Lease term
= 1,996 / 5
≈ 399 million

Interest expense for year 1 (using the effective interest method):

Interest_1 = Lease liability × r
= 1,996 × 8%
≈ 160 million

Total rental costs for year 1 as reported in the income statement:

Dep_1 + Interest_1
= 399 + 160
= 559 million

3. Comparison of P&L before and after IFRS 16

EBITDA

According to IFRS 16:

EBITDA = EBIT_before_rent
= 2 billion

Because depreciation of ROU and interest expense are below EBITDA.

Before IFRS 16: 1.5 billion
After IFRS 16: 2 billion

EBITDA increased by exactly 500 million.
Increase by approximately 33%

EBIT

EBIT = EBITDA − depreciation (including ROU)

New EBIT:

2 billion − (0.5 + 0.399)
Approximately 1.101 billion

Compared to the previous 1 billion, EBIT increased slightly because ROU depreciation (399 million) was smaller than the old rent (500 million).

Net profit

In the first year, the total rental cost on the P&L was 559 million, which was higher than the cash rent of 500 million.

This is the "front-loading" effect – high costs at the beginning of the period due to interest being charged on a large outstanding balance.

Therefore, the net profit in the first year is usually mild, even though EBITDA increased.

4. Two crucial verification lines (often overlooked by competitors)

(1) Compare actual payments with P&L costs

Year 1:

• Cash paid: 500 million
• Total P&L cost: 559 million

The difference of 59 million is the upfront cost due to interest payments.

Over the following years, interest gradually decreases as the outstanding balance declines according to the amortization schedule (principal and interest allocation schedule).

(2) If there are variable leases or associated services

If the contract includes:

• The rent varies with revenue.
• Or a service component (non-lease component)

This portion still contributes to OPEX and still reduces EBITDA.

Then:

Actual EBITDA
< 500 million

This is why not every IFRS 16 implementation results in a "full" increase in EBITDA.

5. Summary of financial logic

IFRS 16 does not make businesses earn more money.

It just:

• Transfer rent away from OPEX
• Bring costs down below EBITDA.
• Making EBITDA look "better" from a technical standpoint.

Meanwhile:

• Cash flow remains constant.
• Debt increased
• The opening net profit may decrease.

This is why CFOs need to read these simultaneously:

EBITDA – EBIT – Net Profit – and Cash Flow

6. Implement in practice to avoid bridge errors.

In practice, errors often come from:

• Cut-off invoices for incorrect billing periods.
• Deferred payment
• The contract is not fully focused.

To reduce risk:

1. Obtain payment data and monthly rental invoices to confirm the total amount is 500 million VND/year.
2. Reconcile lease payments against the contract schedule to avoid discrepancies.
3. Export data to a Bridge template to automatically update KPIs instead of manually.

When transaction-level data is controlled, the EBITDA bridge will truly reflect the economic reality.

An increase in EBITDA, as exemplified above, will lead to changes in common ratios such as EV/EBITDA and Net Debt/EBITDA. The following section will analyze how to correctly interpret these ratios to avoid misvaluing businesses after IFRS 16.

How does IFRS 16 change EV/EBITDA?

When analyzing How does IFRS 16 affect EBITDA?Many CFOs stop at the fact that EBITDA is increasing. However, in business valuation, the more important question is: how has EV/EBITDA changed, and does that change reflect true economic value or is it merely an accounting effect?

After adopting IFRS 16, EBITDA typically increases because operating lease costs are no longer included in operating expenses (OPEX) but are separated into depreciation of assets under leasehold and interest on leased debt – two items that fall under EBITDA. As EBITDA increases, the denominator of the ratio... EV/EBITDA (The valuation ratio, based on enterprise value divided by EBITDA), is larger, so mechanically, this ratio may decrease. The business may appear "cheaper" at first glance, even though its actual business operations and cash flow remain unchanged.

However, the story doesn't end there. IFRS 16 also brings lease obligations onto the balance sheet in the form of... lease liabilitiesIn many valuation models, lease debt is viewed similarly to financial debt and is added to the calculation. net debtThen:

EV = Market Cap + Net Debt (+ Lease liabilities if considered as debt)

Previously, a company might have 2 trillion VND in debt and no recorded lease liabilities, but after IFRS 16, an additional 1 trillion VND in lease liabilities could appear. The EV (Equity Value) would therefore increase, even if market capitalization remains unchanged.

We have two effects occurring simultaneously:

• EBITDA increases → EV/EBITDA decreases (mechanical impact from the denominator)
• EV increases due to lease debt → EV/EBITDA increases (impact from the numerator)

In reality, these two effects rarely cancel each other out completely. Depending on the lease structure, EV/EBITDA may decrease slightly or remain almost unchanged. The danger is that if analysts only look at an increase in EBITDA without adjusting for EV, they may mistakenly conclude that the business is undervalued.

When should you use EBITDAR instead of EBITDA?

For industries with a high proportion of leases, such as retail, logistics, aviation, or restaurant chains, the lease structure can account for a significant portion of operating costs. In this case, using EBITDAR (Profit before interest, taxes, depreciation, and rent) helps eliminate the distinction between businesses that lease assets and businesses that own assets.

EBITDA = EBITDA + Rent

Using EBITDAR is particularly useful when:

• Compare businesses that have adopted IFRS 16 with businesses that have not.
• Compare companies that lease a lot of space with companies that own real estate.
• Analyzing operational efficiency "before asset restructuring"

The two-step comparison rule to avoid mispricing.

Instead of simply recommending "caution," a stricter approach is to apply a two-step rule:

Step 1: Normalize EV

Clearly define whether net debt includes lease liabilities. If one company records lease debt while another does not, adjustments are needed to ensure consistent debt definitions.

Step 2: Standardize KPIs

Choose one of three directions:

• Use Reported EBITDA (as IFRS 16 applied) for both companies.
• Adjusting to cash-based EBITDA (bringing rent back)
• Alternatively, use EBITDAR to eliminate differences in lease structure.

Only when both the numerator and denominator are standardized does the valuation coefficient become truly comparable.

Consequences of governance for the CFO

IFRS 16 doesn't inherently make businesses "cheaper" or "more expensive." But it changes how the market perceives valuation metrics. When investors ask why EV/EBITDA is down, the CFO must be able to explain:

• What portion is due to accounting reclassification?
• How much of this is due to actual changes in operational performance?
• What is the rent intensity in relation to total costs?

In practice, this largely depends on transaction layer data. If rental costs are not clearly separated into fixed leases, variable leases, and ancillary services, calculating EBITDAR or bridge EV/EBITDA will easily lead to errors.

One practical approach is:

• Analyze the proportion of rental costs in total operating expenses to determine whether EBITDAR is necessary.
• Normalize rental cost data by business unit (BU) to explain profit margin variability when investors inquire.
• Set up a dashboard to compare EV/EBITDA and EBITDAR under various leasing scenarios to assess pricing sensitivity.

While valuations can be "inflated" by accounting changes, the real risk often lies in... covenants loan – that is, the binding financial terms in credit agreements. This is where IFRS 16 can have a real impact on a company's liquidity and access to capital.

 

While valuations can be "inflated" by accounting changes, the real risk often lies in... covenants loan – that is, the binding financial terms in credit agreements. This is where IFRS 16 can have a real impact on a company's liquidity and access to capital.

How does IFRS 16 affect loan covenants?

When IFRS 16 brings lease debt onto the balance sheet, total debt increases significantly. This alters the leverage ratios, even if cash flow and operating efficiency remain unchanged.

A common indicator in loan agreements is:

Leverage = Net Debt / EBITDA

In this context, Net Debt typically includes borrowings minus cash. After IFRS 16, if the contract defines “Debt” to include lease liabilities, then Net Debt increases. Although EBITDA also increases, the increase in debt may be greater than the rate of increase in EBITDA, leading to a worsening leverage ratio.

Another indicator is:

Interest Coverage Ratio = EBITDA / Interest Expense

When IFRS 16 is implemented, interest expense increases due to the inclusion of lease interest. EBITDA increases, but if lease interest is high, the interest coverage ratio may decrease. This is particularly sensitive for businesses with a high proportion of leases.

Therefore, IFRS 16 can:

• Increases total accounting debt.
• Change the way interest is calculated on loans.
• This directly affects the covenant headroom (the amount of room before a clause can be violated).

It is worth noting that many loan agreements were signed before IFRS 16 came into effect. Therefore, some agreements apply a mechanism called “Frozen GAAP” – meaning that financial indicators are calculated according to the old accounting standards to avoid violations due to changes in accounting standards, rather than changes in business.

Without this clause, the CFO needs to conduct a very thorough review:

• Does the definition of "debt" include lease debt?
• Does the definition of “EBITDA” have adjustments to IFRS 16?
• What percentage of the safety room (headroom) is left?

This isn't just an accounting issue; it's about liquidity risk management. A company might look better on its EBITDA report, but be nearing the brink of violating its covenant.

Why does lease contract data determine the quality of the analysis?

From a technical perspective, the "EBITDA uplift"—that is, the increase in EBITDA—depends heavily on the quality of the lease contract data. Not all contracts will have the same impact.

The key factors include:

• Actual lease term (including the right to renew)
• The discount rate – often called the incremental borrowing rate (IBR) – is the assumed borrowing interest rate of a business for a similar contract.
• Payments that vary based on revenue or price index (e.g., CPI-linked)
• Are the additional services included in the rental fee separate from the rent?
• Contract modification or remeasurement

The initial recognition value of lease debt is calculated at its present value (PV):

PV = Σ [Payment_t / (1 + r)^t]

Where r is the IBR and Payment_t is the rental cash flow per period.

A single incorrect discount rate or lease term can lead to errors in the entire lease liability and ROU asset, resulting in discrepancies in depreciation, interest expenses, and ultimately, an incorrect EBITDA bridge.

One often overlooked but significant issue is "embedded leases"—service contracts that essentially grant control over a specific asset. If not properly identified, these costs can remain in OPEX and lead to inconsistent EBITDA analysis.

Therefore, in addition to understanding how IFRS 16 affects EBITDA, CFOs need to ensure they have a complete and up-to-date lease register: contract code, payment schedule, discount rate, renewal terms, price adjustment index, and lease/non-lease separation.

The month-end close process under IFRS 16

Even with accurate contract data, the EBITDA bridge can still be off-monthly if the closing process is not well-controlled.

Common causes include:

• The rental invoice was recorded for the wrong period (cut-off).
• Price adjustments based on the CPI index have not yet been updated.
• The contract was extended but the depreciation schedule has not been adjusted.
• Incorrectly separating the service and rental components.
• Contracts denominated in foreign currencies cause exchange rate discrepancies.

Therefore, the month-end close process should have at least three layers of control:

1. Contract-invoice-payment matching (3-way match)
2. Report comparing actual payments against contract payment schedule.
3. Monthly roll-forward report of ROU asset and lease liability

Only with a complete audit trail and regular reconciliation can a business ensure that its EBITDA bridge doesn't "drift" away over time.

Standard adjustments for analysts to compare businesses that have adopted IFRS 16 with those that have not.

When comparing two companies – one that has adopted IFRS 16 and one that still adheres to the old standard – simply looking at reported EBITDA, EV/EBITDA ratio, or leverage ratio can easily lead to misleading conclusions. Therefore, professional analysts often make a series of adjustments to bring the data into a consistent "economic language."

The key is not to adjust for aesthetics, but to adjust according to the objective: valuation, loan covenant review, or internal governance analysis. Each objective will require a different set of adjustments.

Below are five core adjustment groups that are commonly used.

1. Convert EBITDA to a rent-based (cash-based) comparable model.

If company A applies IFRS 16 and company B does not, A's EBITDA is usually higher because rental costs have been reclassified. For a fair comparison, analysts usually calculate adjusted EBITDA.

General formula:

Adjusted EBITDA = Reported EBITDA − (ROU Depreciation + Lease Interest) + Cash Rent Equivalent

In there:

• Reported EBITDA: EBITDA according to IFRS 16
• Cash Rent: actual rent paid during the period (accurately reflects cash flow pressure)

The goal of this adjustment is to bring the EBITDA of companies applying IFRS 16 back to a "rented" state, as it was before, for comparison over time or with companies that have not applied it.

This adjustment is for comparability purposes only and is not intended to replace the official report.

2. Normalize EV/EBITDA or switch to EBITDAR.

When valuing a company, the EV/EBITDA ratio is highly sensitive to IFRS 16. EV (Enterprise Value) is typically calculated as follows:

EV = Market capitalization + Net Debt

If lease liabilities are considered financial liabilities, the EV needs to include this amount. At the same time, EBITDA has increased due to IFRS 16. This creates a double impact:

• EBITDA increases → EV/EBITDA decreases mechanically.
• Net Debt increases → EV increases

To standardize, the analyst can:

• Add lease liabilities to the net debt of both businesses.
  or
• Use EBITDAR (earnings before interest, taxes, depreciation, and rent).

Recipe:

EBITDAR = EBITDA + Rent expense

EBITDAR is particularly useful for industries with high rental intensity (retail, logistics, aviation), where varying rental structures can distort pricing ratios.

The goal here is valuation fairness – ensuring comparisons are based on real economic performance rather than standard accounting differences.

3. Adjust the leverage ratio: separate debt and lease debt.

Leverage is typically calculated as follows:

Leverage = Net Debt / EBITDA

Following IFRS 16, Net Debt increased due to the inclusion of lease liabilities, while EBITDA also rose. However, in bank covenant analysis, many organizations still prefer to look at "bank debt leverage"—that is, leverage based on net debt.

Therefore, the analyst can calculate two versions:

Pure bank leverage = Bank Debt / EBITDA cash-based

Total Leverage = (Bank Debt + Lease liabilities) / EBITDA reported

This separation helps to accurately reflect the actual borrowing pressure compared to operating lease obligations.

The objective here is covenant analysis – checking the ability to meet the loan terms.

4. Front-loading effect type to visualize a "straight line" trend.

IFRS 16 applies the effective interest method, resulting in high interest expense at the beginning of the period, which gradually decreases over time. This creates a front-loading effect – the total accounting cost (depreciation + interest) is higher than the actual rent paid in the early years.

If you want to see a stable profit trend, an analyst can:

• Compare the total cost of hiring an accountant with cash rent each year.
• Normalize by using cash rent instead of (Dep + Interest).

The goal here is front-loading normalization – removing accounting noise to analyze long-term business trends.

5. Adjust ROA and ROCE: Type ROU to view core performance

IFRS 16 increases total assets due to the recognition of ROU assets (rights to use assets). This can mechanically reduce ROA (Return on Assets) or ROCE (Return on Capital Employed).

ROA = Net Profit / Total Assets
ROCE = EBIT / Capital Employed

When comparing core performance, analysts can:

• Remove ROU asset from denominator
  or
• Calculate ROCE based on “core” capital, excluding leased assets.

The goal here is management performance analysis – evaluating actual operational efficiency, avoiding the impact of changing benchmarks.

Linking adjustments to objectives: pricing, covenant, or governance?

One often-overlooked point is that there is no "one-size-fits-all" regulator.

• If the goal is valuation → normalize EV and EBITDA or use EBITDAR
• If the goal is covenant → separate debt and lease debt, check headroom.
• If the goal is internal governance → use adjusted cash-based EBITDA to track performance.

Therefore, adjustments must be accompanied by a clear purpose, avoiding the situation of "making adjustments because others are making adjustments."

Data layer execution suggestions

These adjustments are only accurate if cash rent, accounts payable, and rental expense classification data are standardized from the outset.

In actual operation:

• Consolidating cash rent by provider and business unit helps to include accurate data in the bridge template.
• Classifying rental costs by cost center allows for the calculation of EBITDAR by operational segment – useful for industry benchmarking.
• Accounts receivable data and payment schedules help in reconciliation with auditors and investors when explanations are needed.

Without this data layer, any adjustments would be mere estimates in Excel.

Once you understand the standard analyst adjustments and the goals of each adjustment, the next step is to structure a minimalist Excel Bridge Template – sufficient to automate conversions and reasonable checks. The following sections will delve into the specific structure and the necessary sanity checks to avoid discrepancies.

Minimalist Excel Bridge Template

One bridge template A good (data adjustment bridge template) doesn't need to be complex, but it must be structured enough to serve three objectives: comparing before and after IFRS 16, normalizing valuation (EV/EBITDA), and checking the loan covenant. A minimalist but effective template should have four main blocks, along with reasonable sanity checks to avoid discrepancies due to discounted present value (PV) or incorrect cut-off.

1. Block 1 – Input P&L according to IFRS 16

This is the data entry section for the report prepared according to IFRS 16. No adjustments are needed at this step. The basic lines include:

• Revenue
• EBITDA (reported)
• Depreciation (including ROU depreciation)
• Interest expense (including lease interest)
• Profit before tax

The data here must match the official report to ensure consistency. The bridge template does not replace financial reports but is merely an additional layer of analysis.

2. Block 2 – Lease-related adjustment line

This is the most important part of the bridge. The table structure should be as follows:

| Items | IFRS 16 (A) | Adjustments | Comparable (B) |

In there:

• Column (A): IFRS 16 data
• Adjustments column: adjust according to target
• Column (B): adjusted figures

Example of adjustments to cash-rent comparable format:

EBITDA (Comparable)
= EBITDA (Reported)
- ROU Depreciation
- Interest on lease loans

• Cash Rent equivalent

Depending on the objectives, the CFO may:

• Add the ROU depreciation in reverse if you want to exclude the effect of leased assets.
• Add back the lease interest if you want to see the profit before all lease obligations are paid.
• Or simply add back cash rent if the goal is to compare with the period before IFRS 16.

The key is that each adjustment must be tied to a clear objective: comparability, valuation, or covenant.

3. Block 3 – Output P&L Comparable

This section displays the adjusted report, for management analysis or presentation to investors. Typically, there will be two sets of figures in parallel:

• Reported (according to IFRS 16)
• Comparable (normalized cash-rent or EBITDAR)

Placing the two columns side-by-side helps the reader immediately understand the accounting impact and the economic impact.

4. Block 4 – Ratio Pack

This section calculates the adjusted financial ratios. A basic ratio pack should include:

• EV/EBITDA (reported and comparable)
• Net Debt/EBITDA
• Interest Coverage (EBITDA / Interest Expense)

If the goal is covenant, consider the following:

Leverage = Net Debt / EBITDA

Interest Cover = EBITDA / Interest expense

Placing ratio packs directly within the bridge template allows CFOs to see the immediate impact of each adjustment on financial ratios.

Sanity Checks are mandatory.

A good bridge template should not only have a formula, but also clear validation.

1. PV Check (XNPV)

The present value (PV) of the lease obligation should be checked using the XNPV function in Excel:

PV = XNPV(rate, cashflows, dates)

If the recalculated PV does not match the recorded lease liability, there may be discrepancies in the discount rate (IBR – incremental interest rate) or payment schedule.

2. Roll-forward ROU & Lease Liability

A roll-forward table should show:

Opening balance

• New generation
  - Principal payment
  ± Remeasurement
  = Ending balance

If the ending balance doesn't match the balance sheet, there's an error with the bridge.

3. Cash Paid Reconcile

Compare:

Total rent paid during the period
z
Reduce rental obligations on the balance sheet.

If there is a mismatch, check for cut-off or misclassification of the period.

Additional "Schedule" sheet

A separate sheet should be added for:

• Payment timeline (annual/monthly payment schedule)
• Interest profile (the evolution of loan interest over time)
• Amortization schedule (principal and interest allocation schedule)

This sheet helps examine the front-loading effect and explains why the opening net profit may be lower than the actual cash rent paid.

Key difference

Many articles only provide a sample table without clearly stating the comparison objective and without sanity checks. A bridge template without verification checks is just a "pretty spreadsheet." A bridge with PV checks, roll-forward, and reconcile is a truly effective management tool.

Data layer execution suggestions

For the template to function properly, the input data must be clean:

• Generate monthly/quarterly cash rent from the expense system.
• Assign supplier codes and contracts to allocate by business unit (BU) or cost center.
• Ensure that accounts payable data matches actual payments to avoid bridge mismatches.

When forecasting or what-if scenario analysis is required, it's advisable to synchronize data to the FP&A system instead of relying entirely on Excel.

After understanding the bridge template structure and required checks, the next section will summarize the most frequently asked questions from CFOs and accountants when applying IFRS 16 to EBITDA analysis, valuation, and loan covenants.

Frequently Asked Questions (FAQ)

Will IFRS 16 increase EBITDA while keeping cash flow unchanged?

Yes. In most cases, EBITDA increases due to cost reclassification (OPEX reclassification – moving lease costs out of operating expenses). Previously, cash rent reduced EBITDA because it was included in OPEX. After IFRS 16, this expense was separated into depreciation of rights of use (ROU) and interest on lease debt, both of which are below EBITDA.

However, The actual cash flow from rent remains unchanged.Businesses still have to make payments according to contracts. Therefore, it is necessary to distinguish between reported EBITDA (EBITDA according to standards) and adjusted EBITDA (EBITDA for management comparison purposes).

How much will EBITDA increase after IFRS 16, and what factors will it depend on?

The increase in EBITDA depends on the lease structure. If the majority of previous lease costs were fixed lease payments, the increase will be significant because that entire portion moves out of OPEX.

Conversely, if the contract includes multiple variable payments (rent-dependent or index-dependent lease payments), or if the business applies short-term/low-value lease exemptions, then a portion of the cost remains in EBITDA, causing the increase to decrease. The lease term and whether or not to separate the accompanying services (lease components) also have a significant impact.

Why do net profits often decrease in the first year of implementing IFRS 16?

The cause lies in the effect. front-loading (Expenses are concentrated at the beginning of the period). Lease interest is calculated using the effective interest method (interest calculated on the decreasing outstanding balance).

In the first year, the large outstanding lease debt results in high interest expenses. When combined with ROU depreciation, the total expenses on the income statement may exceed the actual lease payments, causing net profit to decrease even if EBITDA increases.

When should EBITDAR be used instead of EBITDA for comparison?

EBITDAR (earnings before interest, taxes, depreciation, and rent) should be used when a business has a high rent intensity, for example, retail or logistics.

In these industries, the “lease or own” structure can cause significant volatility in EBITDA between businesses. EBITDAR helps eliminate this noise and increase comparability.

Why might EV/EBITDA be "artificially cheap" after IFRS 16?

When EBITDA increases due to IFRS 16, the denominator of the EV/EBITDA ratio becomes larger, causing the ratio to decrease. The business may appear mechanically "cheaper".

However, EV (Enterprise Value) also often increases because lease obligations are added to net debt. Without normalizing both EV and EBITDA, comparing valuation multiples can be misleading.

Does IFRS 16 increase or decrease the risk of covenant violations?

There is no fixed answer. An increase in EBITDA may improve some ratios, but total debt also increases because lease debt is recorded on the balance sheet.

The actual impact depends on the definition in the loan agreement: Does debt include lease payments? Is the EBITDA adjusted for IFRS 16? Some agreements apply Frozen GAAP principles (based on the old standard) to maintain comparability. The CFO needs to check the headroom (covenant margin) before and after implementation.

Are variable lease payments capitalized, and how does this affect EBITDA?

The rent varies depending on revenue or actual usage. not capitalized, which is recorded directly in operating expenses (OPEX).

Therefore, these items still reduce EBITDA. If the business has a large proportion of variable payments or adjusts for index-based costs (e.g., linked to the CPI), the "EBITDA uplift" will not be complete.

How should CFOs report EBITDA “IFRS 16 on/off” for management purposes?

The best practice is to maintain two sets of numbers in parallel:

• A set of numbers conforming to the standards (IFRS 16 on) for compliance and external reporting purposes.
• Management reporting (internal reports) are based on cash or adjusted EBITDA to support forecasting, bonus calculation, and covenants.

The bridge between the two sets of numbers needs to be transparent and traceable.

What minimum data is needed to correctly calculate lease schedules and bridges?

Businesses need one lease register (The complete lease contract register includes:

• Payment schedule
• Lease term
• The discount rate or incremental borrowing rate (IBR)
• Renewal terms
• Separating the lease portion from the service portion.

The lack of this data will lead to incorrect lease schedules, incorrect remeasurements, and incorrect EBITDA bridges.

Conclude

IFRS 16 doesn't make businesses "richer" or generate more cash flow, but it changes how we look at operating performance through EBITDA. When lease expenses are reclassified from operating expenses to depreciation of leasehold assets and interest on lease debt, EBITDA is technically up.Meanwhile, cash rent remains constant. Without a clear understanding of this mechanism, CFOs and analysts can easily misinterpret earnings quality, misvalue EV/EBITDA, or misassess covenant risk.

The core issue isn't whether "EBITDA increased," but rather: by how much, for what reasons, and whether adjustments are needed for comparison. A truly effective analytical system requires at least three layers:

• Distinguish between Reported EBITDA (compliant with IFRS 16) and Adjusted EBITDA or EBITDAR (for comparison and management purposes).
• Standardize both EV and EBITDA when valuing to avoid "artificially low prices".
• Establish a controlled EBITDA bridge linked to lease data, payment schedules, and debt obligations.

From a management perspective, IFRS 16 forces CFOs to upgrade their thinking from "reading reports" to "controlling input data." Discrepancies don't stem from PV formulas or discount rates, but from contracts lacking metadata, incorrect lease/non-lease classification, improper invoice cut-off times, and lack of accounts receivable reconciliation. When lease data is standardized according to contracts, business units, and cost centers, bridge building, KPI standardization, and covenant negotiation become proactive rather than reactive.

Therefore, the correct question for the CFO is not "Will IFRS 16 increase EBITDA?", but rather:

• Which version of EBITDA are we using for what purpose?
• Has the bridge fully reflected cash rent and lease liability?
• Is the data system robust enough to be accountable to banks, investors, and auditors?

IFRS 16, if properly analyzed and data controlled, will no longer be an accounting risk, but will become a tool to help businesses understand their lease structure, debt pressures, and true profit quality.