TL;DR:

IFRS 16 moved operating lease costs off the P&L and replaced them with depreciation and interest. That mechanical shift inflates EBITDA by 20–50% for lease-heavy companies — without any real improvement in performance. Lenders and analysts know this. Your board needs to understand it before the next covenant review.

Your EBITDA Just Jumped. Nothing Actually Got Better.

When IFRS 16 came into effect, finance teams at lease-heavy companies watched EBITDA rise sharply. Property companies, airlines, retailers, logistics operators — the numbers moved, sometimes dramatically. Nothing changed in the business. The leases were the same. The cash was flowing the same way. Only the accounting changed.

That gap between what the number shows and what actually happened is the central problem with IFRS 16. It doesn’t affect cash. It doesn’t affect commercial reality. But it does affect every metric that sits above EBITDA, every covenant ratio tied to EBITDA, and every board presentation that uses EBITDA as a proxy for operating performance.

If you’re a CFO, a financial controller, or a board member trying to understand what IFRS 16 actually did to your company’s numbers — this is the guide that gives you the full picture.

What IFRS 16 Changed. What It Didn’t.

Before IFRS 16, operating leases stayed off the balance sheet. The annual lease payment hit the income statement as a single operating expense line. EBITDA absorbed it. Net debt didn’t include it. Return on assets wasn’t affected by it.

Under IFRS 16, almost every lease now goes on the balance sheet. You recognise a right-of-use (ROU) asset and a lease liability for the present value of future lease payments. From that point forward:

• The old operating lease expense disappears from EBITDA
• Depreciation on the ROU asset replaces it, sitting below EBITDA
• Interest on the lease liability is also below EBITDA
• Cash flow from financing activities absorbs the principal repayments

What didn’t change: how much cash you pay. The lease economics didn’t move. You still owe the same rent. The only thing that changed is where the obligation appears in your financial statements.

Which Leases Are in Scope

IFRS 16 covers leases longer than 12 months with an underlying asset value above USD 5,000. Short-term leases and low-value assets can be exempted. Everything else — office space, warehouses, retail units, vehicles, IT equipment, aircraft — goes on balance sheet.

For a retail company with 200 store leases, or a logistics business with a heavy vehicle fleet, or a property developer with long-term land leases, the balance sheet impact is significant. Lease liabilities can run to hundreds of millions.

IFRS 16 Impact on EBITDA: Why Your Numbers Jumped

The moment you reclassify a lease expense as depreciation and interest, those costs move below the EBITDA line. EBITDA rises, even though nothing changed in the business.

For a company paying SAR 10 million a year in operating leases, the IFRS 16 EBITDA adjustment could add SAR 10 million or more to reported EBITDA. It’s a presentation change. But it reads as earnings improvement on any dashboard that doesn’t carry an IFRS 16 footnote.

The size of the adjustment depends on three things:

• Total annual lease costs — the more you lease, the bigger the adjustment
• Lease terms — longer leases mean larger recognised liabilities and higher interest charges early in the lease term
• Discount rate — the incremental borrowing rate used to calculate the lease liability affects the split between depreciation and interest

Pre IFRS 16 EBITDA vs Post IFRS 16 EBITDA: A Direct Comparison

The table below shows how the same company with the same leases reports differently under old IAS 17 versus IFRS 16.

Notice: net profit is identical in both cases. The cash is identical. The only differences are in EBITDA (up 25%) and the balance sheet (now showing a lease liability). That’s the IFRS 16 effect in a single table.

How IFRS 16 Hits Every Other Financial KPI

EBITDA is the most visible casualty, but the standard reshaped almost every ratio a CFO monitors.

Net Debt and Leverage Ratios

Lease liabilities now count as debt. A company with SAR 200 million in recognised lease liabilities has added SAR 200 million to its net debt position, even if it had zero borrowings before. Debt-to-EBITDA ratios move in two directions. EBITDA rises. Debt rises too. The net effect depends on the specific numbers, but many companies showed apparent ratio improvement that had nothing to do with credit quality.

That’s a problem if your covenants were calibrated pre-IFRS 16. A covenant test that was comfortably passed at a debt-to-EBITDA of 2.5x might now show 1.8x — not because the business is healthier, but because the standard changed how you measure both numbers.

Return on Assets

ROU assets sit on your balance sheet at the present value of future lease payments. For a company with large property or fleet leases, total assets jump significantly. That inflates the denominator in return on assets, reducing the ratio even if operating performance is unchanged.

Interest Coverage

Interest expense now includes interest on lease liabilities. If your interest coverage covenant is calculated on EBIT (not EBITDA), the denominator has expanded. EBIT itself changes because depreciation on ROU assets now sits there, and you’ve added lease interest. Depending on lease size and maturity, interest coverage can move materially.

Operating Cash Flow

Pre-IFRS 16, the full lease payment flowed through operating activities. Post-IFRS 16, the principal repayment component shifts to financing activities. Operating cash flow rises mechanically. This looks positive to anyone who doesn’t adjust for the standard, but it’s just a classification change — not real cash improvement.

How to Calculate Your IFRS 16 EBITDA Adjustment

If you’re restating EBITDA for comparative purposes — or explaining the IFRS 16 impact to a board that’s comparing this year to last year — the calculation has three components.

Step 1: Identify all in-scope leases. Pull every lease with a term above 12 months and underlying asset value above USD 5,000. Short-term and low-value exemptions reduce the population but don’t eliminate it.

Step 2: Calculate the EBITDA uplift. The EBITDA adjustment equals the operating lease expense that was removed. For each lease, that’s approximately the annual cash payment before the standard changed. Summing those across all leases gives you the gross EBITDA uplift.

Step 3: Quantify the below-EBITDA charges. The net effect on net profit is close to zero. The effect on EBITDA can be large. That gap is what you need to communicate clearly to anyone using EBITDA as a performance measure.

What the Data Shows: Evidence from Real Companies

Academic studies and analyst reports on IFRS 16 adoption consistently show the same pattern. EBITDA inflated 20–50% for lease-heavy sectors upon adoption. Airlines saw the largest impacts — some European carriers reported EBITDA multiples that became meaningless without explicit IFRS 16 adjustments. Retail chains and logistics operators followed closely.

In the GCC specifically, real estate companies and large commercial operators with multi-decade land leases faced some of the most significant impacts. A company holding 25-year ground leases had to bring the entire present value of those leases onto the balance sheet in one transition adjustment.

Analysts covering lease-intensive sectors moved quickly to develop adjusted EBITDA metrics that strip out the IFRS 16 effect. EBITDA before IFRS 16 impact became a standard disclosure in several sectors. If you don’t address it, analysts adjust the number themselves. They don’t always get it right.

Sector-Specific Magnitudes

The IFRS 16 EBITDA adjustment varies by sector because lease intensity varies. A manufacturing company with a single factory lease sees a modest effect. A retailer with 300 stores sees a material one. The sectors where the impact is largest:

• Aviation: Aircraft operating leases represent a large fraction of the asset base. EBITDA inflation at adoption ranged from 30–60% for major carriers.
• Retail: Store lease portfolios drive 20–40% EBITDA increases. Comparable periods became essentially incomparable without restatement.
• Real estate: Ground leases with long terms create large liabilities. The discount rate sensitivity is high — small changes in the IBR move the lease liability significantly.
• Logistics and transport: Vehicle and warehouse leases combine. EBITDA impact of 15–30% is typical for large operators.

What Boards, Analysts, and Lenders Need to Hear

The conversation around IFRS 16 isn’t just an accounting question. It’s a communication problem. Your board may not understand why EBITDA jumped without a corresponding improvement in cash generation, lenders may have covenants that were calibrated to pre-IFRS 16 numbers and investors may be comparing your EBITDA to a peer that adopted the standard in a different year.

For Boards

The key message is this: the EBITDA improvement is a presentation change, not an operating improvement. Cash generation is unchanged. Net profit is unchanged. The standard reclassified lease costs — it didn’t reduce them. Any performance assessment based on EBITDA needs an explicit IFRS 16 adjustment or it’s measuring accounting, not business.

For Lenders

If your financing agreements reference EBITDA without IFRS 16 carve-outs, you have two conversations to have. First: which definition of EBITDA governs? Second: if the covenant was set pre-adoption, does the lender expect you to adjust the metric to match the old basis, or have they already repriced the covenant for the new standard? Many borrowers assumed lenders would automatically accept the IFRS 16 inflated EBITDA — some lenders didn’t.

For Investors and Analysts

Disclose the IFRS 16 EBITDA adjustment explicitly. Present both the reported EBITDA and the IFRS 16 adjusted EBITDA (as if the old standard still applied). Show the lease liability separately from financial debt in your leverage analysis. Analysts covering lease-intensive sectors expect this level of disclosure. Companies that don’t provide it get reconstructed estimates — which are sometimes worse than the real number.

The Bottom Line on IFRS 16 Impact

IFRS 16 didn’t change how leases work commercially. It changed where they sit in your financial statements. For lease-heavy companies, that presentation change cascades through EBITDA, net debt, leverage ratios, return on assets, interest coverage, and operating cash flow — all without a single dollar of operational change.

The companies that handle this well do three things. They model the full quantitative impact by lease portfolio. They adapt their internal performance metrics to use pre-IFRS 16 EBITDA where appropriate. And they communicate clearly and proactively with lenders, analysts, and boards before questions are asked — not after.

If you haven’t done a thorough IFRS 16 impact analysis, or if your board presentations still use reported EBITDA without adjustment, that’s the place to start.

IFRS 16 FAQs

Does IFRS 16 affect cash flow?

Not total cash flow, but the classification changes. Principal lease repayments move from operating activities to financing activities. Operating cash flow rises mechanically. Total cash out is the same as before the standard.

What is the IFRS 16 EBITDA adjustment?

It’s the amount by which reported EBITDA overstates the pre-IFRS 16 EBITDA baseline. It equals the operating lease expense that was removed from the income statement when leases moved on-balance-sheet. For companies with large lease portfolios, this adjustment can be 20–50% of total EBITDA.

Does IFRS 16 affect net profit?

The total effect on net profit is close to zero over the full lease term. Depreciation plus interest replaces the old lease expense. In early years the combined charge is slightly higher than the old lease payment (due to front-loading of interest), creating a modest net profit reduction. This reverses in later years.

How does IFRS 16 affect leverage ratios?

It typically inflates EBITDA and increases net debt simultaneously. The net effect on a debt-to-EBITDA ratio depends on the specific numbers but often shows an apparent improvement that doesn’t reflect underlying credit quality. Lenders familiar with the standard look at both reported and lease-adjusted ratios.

What is the incremental borrowing rate (IBR) under IFRS 16?

The IBR is the rate of interest a lessee would pay to borrow funds to purchase the underlying asset over a similar term and in a similar economic environment. It’s used when the interest rate implicit in the lease can’t be readily determined. The IBR drives lease liability size and the depreciation-interest split — choosing it correctly matters.

What happens to operating lease expense under IFRS 16?

For in-scope leases, it disappears from the P&L. It’s replaced by depreciation on the ROU asset (which sits in operating expenses or COGS depending on the nature of the lease) and interest on the lease liability (which sits in finance costs).

Can companies exclude IFRS 16 from their covenant calculations?

Yes, if the credit agreement allows it. Many financing agreements executed before 2019 contain frozen GAAP clauses or IFRS 16 carve-outs that preserve pre-adoption definitions of EBITDA and net debt. For agreements executed after adoption, it depends on what the parties negotiated. Review your facilities agreement — this is not a question to leave to assumption.

How does IFRS 16 affect return on equity?

ROE is influenced indirectly. The transition adjustment for first-time adoption often creates a debit to retained earnings (if the modified retrospective method was used), which reduces equity. Higher total assets from ROU assets reduce asset-based ratios. The net equity effect depends on whether the lease liability exceeds the ROU asset value at transition.

What is a right-of-use (ROU) asset?

It’s the balance sheet asset that represents a lessee’s right to use an underlying asset over the lease term. Learn more about IFRS 16 lease accounting basics. Initially measured at the lease liability amount, adjusted for prepaid lease payments, initial direct costs, and expected dismantlement costs. It depreciates over the shorter of the lease term and the useful life of the underlying asset.

What is pre IFRS 16 EBITDA?

Pre IFRS 16 EBITDA is reported EBITDA adjusted to remove the effect of the standard — essentially, what EBITDA would have been if operating leases had remained off-balance-sheet as they were under IAS 17. It’s a widely used metric in sectors with large lease portfolios and is often presented alongside reported EBITDA in investor materials.

What is post IFRS 16 EBITDA?

Post IFRS 16 EBITDA is the reported figure under the current standard — with lease depreciation and interest sitting below EBITDA. It’s the number that appears in financial statements but overstates the comparable historical EBITDA for lease-heavy companies.

How does IFRS 16 affect pre vs post IFRS 16 EBITDA comparisons?

Directly — post IFRS 16 EBITDA is higher than the equivalent pre IFRS 16 figure by roughly the amount of in-scope operating lease expense. Year-on-year comparisons are distorted unless both periods are presented on the same basis. Most analysts either restate historical periods or apply an explicit IFRS 16 adjustment to reported figures before drawing conclusions.