IFRS 16
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Learn why many companies continue to report pre-IFRS 16 metrics despite the standard’s adoption, and why precision in IFRS 16 inputs is critical.
The introduction of IFRS 16 has transformed lease accounting, bringing nearly all leases onto the balance sheet. While this change enhances transparency, it also introduces complexity, especially in reporting.
At LOIS Leasing, we emphasise that getting the inputs right is essential for accurate financial compliance and decision-making.
The IFRS 16 shift: More than just accounting
IFRS 16 replaced IAS 17 to eliminate off-balance sheet financing. Lessees now recognize Right-of-Use (ROU) assets and lease liabilities for nearly all leases.
This change affects financial reporting as well as how businesses are valued, how analysts interpret leverage, and how investors assess operational efficiency.
Why many companies still provide pre-IFRS 16 adjustments
Despite IFRS 16 being in effect since 2019, many companies continue to provide pre-IFRS 16 adjusted metrics for various reasons:
- Comparability across time: Investors and analysts often want to compare current performance with historical data.
- Peer benchmarking: US GAAP still uses a dual lease model, so pre-IFRS 16 metrics help align comparisons.
- Covenant compliance: Many debt covenants were structured before IFRS 16 and still rely on legacy metrics.
- Investor communication: The uplift in EBITDA is accounting-driven, not economic.
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Internal decision-making: Management teams often rely on legacy metrics for budgeting and performance evaluation.
As well as providing investors perceived value, many companies provide this information for banks, and in particular, new covenants. In fact, a 2024 industry review by Grant Thornton found that over 70% of mid-market and syndicated loan agreements still use pre-IFRS 16 EBITDA for covenant testing.
Pre-IFRS 16 numbers are still used by banks for new covenants, however traditional valuation metrics
need to be properly quantified to avoid being misleading.
So why do many banks still use pre-IFRS 16 metrics for loan covenants?
Even five years after IFRS 16’s implementation, most banks continue to base loan covenants on pre-IFRS 16 earnings metrics, especially EBITDA. Here's why:
- Frozen GAAP clauses: Many loan agreements include “frozen GAAP” provisions, allowing covenant calculations to remain based on IAS 17 accounting standards. In high-yield markets, frozen GAAP clauses were present in more than 60% of European deals post-IFRS 16 adoption.
- Avoiding artificial leverage increases: IFRS 16 increases debt without a corresponding cash flow change, which can distort leverage ratios and breach covenants unnecessarily.
- Preserving historical consistency: Banks and borrowers prefer continuity in covenant testing to avoid renegotiations or technical defaults.
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Operational simplicity: Maintaining pre-IFRS 16 metrics avoids the need to manage dual accounting systems for the bulk of the operational business.
Why inputs matter more than ever
Under IFRS 16, traditional valuation metrics like EV/EBITDA can be misleading unless they are properly quantified:
- EBITDA may appear inflated due to reclassification of lease expenses.
- Enterprise Value (EV) increases with lease liabilities, while equity value remains unchanged.
- Sector-specific impacts vary. Retail, airlines, telecommunications, and healthcare all experience different valuation distortions.
Key inputs that must be right
To ensure robust valuations under IFRS 16, professionals must carefully calibrate:
- Lease terms and renewal assumptions
- Discount/IBR rates
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Payment profiles and timings
- Sector-specific metrics
IFRS 16 has brought transparency, but it demands precision. LOIS Leasing helps clients enhance their reporting to stay audit-ready while unlocking value through strategic insights based on your unique lease data.
Ready to get more from your lease data and simplify your IFRS 16 reporting? Get in touch today.