The primary impact of ASC 842 and IFRS 16 is that both standards require nearly all leases to be reported on the lessees' balance sheets as assets and liabilities. However, a key difference between IFRS 16 and ASC 842 is as follows:
Under ASC 842 (US GAAP) Companies will still classify their leases as operating vs. finance, whereas under IFRS 16 all leases will now be treated as a finance lease under a single lessee accounting model.
This means that under ASC 842 there is generally no change to the income statement impact for either finance or operating leases as finance leases still impact the income statement through interest and depreciation and operating leases are amortized / accreted from the lease liability and right-to-use lease asset generally producing a straight-line lease expense. Under IFRS 16, essentially all leases are now to be treated as finance leases creating a divergence in income statement impact from US GAAP and historical IFRS earnings as the majority of former operating lease expenses will now be reflected in interest / deprecation under the singular lessee accounting model.
Key take-away – Under IFRS 16, EBITDA and reported debt will typically be higher than historical periods. When performing diligence on cross-border deals, understanding IFRS 16’s impact should be a key deal consideration as it will impact the historical financials and present different considerations depending on the valuation methodology.