Since 1 January 2019 the new accounting standard IFRS 16 has been in force. In the future almost all leasing agreements (rental and others) are to be shown on corporate balance sheets. Although IFRS 16 was already published in 2016, its initial application now poses substantial challenges for companies and investors and is a source of uncertainty.
Admittedly, there are no changes as regards companies’ day-to-day business, their contracts and payments. But the new standard does have substantial repercussions on their balance sheets, income statements and free cash flows. Depending on how large the company’s volume of operating lease contracts (rental) is, there may be massive repercussions on the level of the debt ratio, EBITDA and other balance sheet and profitability ratios. A study by the accounting firm PWC shows that there is a median increase of 13% in EBITDA and of 22% in debt. Especially affected are retail companies, airlines and logistics service providers, which generally have a large number of leasing contracts.
The newly applicable accounting standard can also lead to changes in the valuation of companies as it changes the input parameters for the DCF models significantly. Basically, the equity value should change little as a higher present value of the free cash flows should be offset by higher debt. The enterprise value (EV), by contrast, will increase significantly. The new standard also poses major challenges for valuations based on a peer-group comparison: current key figures are often no longer comparable with those of the past. In addition, the accounting standard applied by the relevant peer company needs to be borne in mind. In the transitional phase, therefore, we recommend exercising increased vigilance.