Valuation Implications of IFRS 16
Navigating the New Lease Accounting Landscape
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九月 19, 2025
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The introduction of IFRS 16 has transformed the way companies account for lease obligations, adding approximately $3 trillion of lease obligations onto balance sheets globally.1 With the International Accounting Standards Board (‘IASB’) conducting a Post-Implementation Review of IFRS 16,2 now is the time for companies to reassess its impact on financial reporting and valuation practices. This article examines IFRS 16’s impact on valuation, exploring sector-specific valuation impacts, disruptions to traditional valuation multiples and key considerations for adjusting for post-IFRS 16. It offers practical insights to help you navigate the complexities surrounding IFRS 16 to produce robust valuations.
Post-Implementation Review: IFRS 16 Under the Microscope
On 17 June 2025, the International Accounting Standards Board (‘IASB’) published the Request for Information Post-implementation Review of IFRS 16 Leases.3 This review includes a Request for Information open through October 2025, focusing on:
- The usefulness of lease-related disclosures
- Estimation challenges with lease terms and discount rates
- Interactions with other accounting standards like IFRS 9 and IFRS 15
While early feedback highlights improved transparency in lease obligations, complexities remain—particularly in lessor accounting and treatment of variable lease payments.
The Rationale Behind IFRS 16
IFRS 16 replaced IAS 17 to eliminate off-balance sheet financing, especially through operating leases. Previously, companies could omit reporting material leasing obligations from their financial statements, which hindered comparability and transparency.
Under IFRS 16:4
- Lessees must recognise Right-of-Use (‘ROU’) assets and lease liabilities for nearly all lease types
- Financial statements purport to better reflect true leverage and asset use
- Analysts benefit from enhanced visibility into operational financing strategies
Globally, the transition brought approximately $3 trillion of lease obligations onto balance sheets.
Sector-Specific Valuation Impacts
The implications of IFRS 16 are particularly pronounced in sectors that use a significant amount of leased assets, as IFRS 16 brought those lease assets to the balance sheet via ROU and the corresponding lease liability. Outlined below are the impacts on valuation metrics of FIRS 16 across sectors, based on our observations relating to annual report disclosures of companies in those sectors:
| Sector | Valuation Impact |
|---|---|
| Retail & Hospitality | Retailers with large store networks (e.g., supermarkets, fashion chains) saw significant increases in liabilities and ROU assets. EBITDA surged artificially (as lease expenses were reclassified), inflating EV/EBITDA multiples unless adjusted. |
| Airlines & Logistics | Airlines and logistics companies, traditionally reliant on lease financing, experienced pronounced balance sheet expansion. Analysts must reconsider asset intensity and capital efficiency metrics in valuations. |
| Telecom & Infrastructure | Tower and spectrum leases affect both earnings and asset bases. Detailed footnote analysis is critical to distinguish recurring lease obligations from strategic infrastructure investments. In fact, even in the post-IFRS-16 environment, the Telcom tower transaction multiples are still expressed on an Earnings Before Interest, Taxes, Depreciation and Amortisation and After Lease Expenses (‘EBITDaL’) basis. |
| Healthcare & Aged Care | Long-term property leases dominate these sectors. While affecting valuation multiples, the lease liability treatment also has implications for credit assessments and cost of capital. |
| Technology & Financials | Minimal effect; clean comparability remains. |
Valuation models must now consider lease intensity, asset structure, and renewal probability in all sectors.
Disruption to Traditional Valuation Multiples
- Guideline Listed Companies
— With lease expenses removed from EBITDA, metrics like EV/EBITDA appear lower, creating artificial comparability gaps
— Enterprise Value (‘EV’) increases due to new lease liabilities, while equity value remains unchanged
— Peer benchmarking requires normalisation to ensure apples-to-apples analysis - Transaction Multiples
— Historical deals pre-IFRS 16 are not directly comparable with current financials
— Unless adjusted for lease capitalisation, valuation metrics could overstate or understate target values
Key Considerations: Adjusting for Post-IFRS 16
To safeguard valuation accuracy, valuations professionals need to:
- Adjust EBITDA for legacy comparisons by adding back lease expenses
- Include lease liabilities as net debt when calculating enterprise value
- Employ Earnings Before Interest, Tax, Depreciation, Amortisations and Leases (‘EBITDaL’) multiples for lease-heavy sectors
- Standardise lease assumptions for all guideline listed companies and precedent transaction multiples
- Assess lease maturity and renewal terms when modelling risk and returns
These adjustments should enhance consistency in both valuation conclusions and relative benchmarking.
Discounted Cash Flow (‘DCF’) and Impairment Testing Best Practices
IFRS 16’s impact extends to cash flow-based modelling under IAS 36, based on our analysis:
VIU (Value in Use)
- Exclude lease payments from operating cash flows
- Include replacement cash flows (especially in the terminal year) for the ROU asset
- Model separately the depreciation of ROU assets and interest on lease liabilities
- Adjust discount rates to reflect post-IFRS capital structure (i.e., include lease gearing in the WACC calculation)
- Include ROU asset (without netting off lease liability) in the carrying value
- Make sure the cross-checks (e.g., Guideline Listed Company and Precedent Transaction multiples) are like for like basis
FVLCD (Fair Value Less Costs of Disposal)
- Include lease renewals as part of market participant assumptions
- Make sure the pre-16 IFRS-discount rates (i.e., excluding lease gearing in the Weighted Average Cost of Capital (‘WACC’)) reflect pre-IFRS capital structure
- Include ROU asset net of lease liability in the carrying value
- Ensure leased asset disclosures support valuation of disposal options
- Make sure the cross-checks (e.g., Guideline Listed Company and Precedent Transaction multiples) are like for like basis
In both cases, aligning lease treatment in all valuation inputs—including cash flow timing, discount rate calibration, and capital expenditures—is essential for reliable outcomes.
Implications on Purchase Price Allocations
With IFRS 16 mandating that nearly all lease types be brought on balance sheet, acquirers must carefully consider the recognition of ROU assets and lease liabilities when determining the fair value of acquired entities. From a Purchase Price Allocation (‘PPA’) perspective, this shift results in the following key implications:
- Recognition of ROU Assets and Lease Liabilities as Identifiable Items.
- Valuation of Favourable or Unfavourable Leases.
- Complexity in Discount Rate Determination: The discount rate used to measure lease liabilities as part of the PPA process should reflect the incremental borrowing rate of the acquiree or a market participant.
- Deferred Tax Considerations: The recognition of lease-related assets and liabilities introduces temporary differences for tax purposes.
For DCF valuation for any other purposes, the cash flows and the discount rate should be on a like for like basis, depending on whether cash flows are pre or post AASB-16 basis similar to above.
Conclusion: Adapting to the New Valuation Landscape Under IFRS 16
Key Takeaways: What Valuation Professionals Must Know
- While IFRS16 purports to improve reporting transparency, valuation analysts must apply greater judgment, sector awareness, and consistency when adjusting financial metrics.
- The standard has disrupted traditional valuation multiples, requiring adjustments to EBITDA, enterprise value, and other metrics to ensure consistent valuations.
- Sector-specific valuation impacts, such as those in retail, airlines, and telecom, must be carefully considered when applying IFRS 16.
- Valuation models must now consider lease intensity, asset structure, and renewal probability in all sectors.
Next Steps: Applying IFRS 16 Effectively
If you are navigating the complexities of IFRS 16 or need support with valuation, impairment testing or purchase price allocations, FTI Consulting offers deep expertise in valuations and technical accounting to guide you in:
- Adjusting financial metrics to ensure accurate valuations
- Applying IFRS 16 to specific industries and sectors
- Conducting impairment testing and purchase price allocations under IFRS 16
- Developing strategies to mitigate the risks associated with IFRS 16
To discuss IFRS 16 and its valuation implications, reach out to our Valuation Advisory Team. We can help you navigate the complexities of the new lease accounting requirements to support accurate outcomes – without surprises.
Footnotes:
1: Effects Analysis | IFRS 16 Leases, IFRS, January 2016
2: Request for Information and comment letters: Post-implementation Review of IFRS 16 Leases, IFRS, 17 June 2025
3: Post-implementation Review of IFRS 16 Leases, IFRS, 17 June 2025
4: IFRS 16 Leases, IFRS, 2025
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发布于
九月 19, 2025
主要联络人
Senior Managing Director, Head of Australia Valuations Advisory
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