Curious what everyone does with leases for non-US companies under IFRS 16 for the Enterprise Value calculation.
For GAAP, we normally only include finance leases / capital leases (not operating lease liabilities) as part of debt when calculating Enterprise Value given these generate some interest expense reported below the income from operations line (which we use to calculate EBITDA and EBIT).
But for IFRS companies, all leases are treated similar to finance leases and the associated interest expense exists below the operating profit line.
What do you all do with lease liabilities for companies under IFRS? Include as part of debt for Enterprise Value or nah?
I'll try to make a "high-level" IFRS to GAAP judgement based on how the leases would likely be classified under GAAP if I have financial statements with notes or any detail as to the composition of lease liabilities. For most (non capital intensive) companies, their largest lease liabilities will be related to facilities. These are typically standard office / warehouse rental contracts that would almost never be classified as finance leases under GAAP. If that's what's comprising the majority of the balance, I would ignore finance leases when calculating EV.
Where it gets tricker is if you're looking at a manufacturing company or in any other capital intensive industry that will have significant non-facility assets on lease contracts. Unfortunately there's no hard and fast rule in those situations and you'd have to compare the cash flows, useful life, etc. to make a true determination.
Thanks - Definitely helpful from an accounting perspective, but I'm curious what normal bankers do in practice. This seems a bit too granular of an approach when dealing with 10+ comps for a high-level exercise.
The answer is it really just depends on your MD's preference. I work predominantly for an MD that showed what he called "cash EBITDA" and included these costs. As long as your comps are like-for-like then you are fine.
As long as you aren't double counting the expense in your cash flows when modelling these out, then you're also fine
Haha true that. Issue is a comp set that has both US and non-US companies. European companies trade at a massive discount based on the multiples we're pulling from FactSet, but I suspect part of the gap is the leases not getting counted in enterprise value by FactSet for the non-US companies.
Think it depends what country you're looking at. I'm pretty sure countries like the UK and Aus have adopted IFRS so that they're included
Hey, you took my financial modeling survey about inefficiencies, I came up with a software platform to automatically extract and format financial data from 10-Ks into your custom templates - eliminating the 15-20 hours per week you spend on manual data gathering and formatting.
Want to see a quick demo of how it works?
Culpa quasi porro cum sit porro earum. Voluptas omnis temporibus expedita et. Molestiae voluptatum perspiciatis alias consequuntur dolor accusamus aut veritatis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...