US Gaap - EU comps
Hi everyone,
Given the difference between the two accounting methodology we have usually different EBITDA for US vs. EU companies (post IFRS 16). When spreading the comps I do understand how to adjust historical years but how do you do that for the projections? Assuming that from what I see so far they are all pre IFRS 16 for us companies.
In summary how do you adjust EBITDA projections in a comp file to make US companies comparable to EU companie (post IFRS 16)
Many thanks guysss
+1
+1
If I’m not mistaken, IFRS 16 essentially changed the treatment of operating leases. Post IFRS all leases are treated as finance leases which has a few consequences for European companies.
Thinking about it conceptually, Post IFRS 16 EBITDA would be the same as GAAP EBITDAR, since GAAP EBITDAR adds back the operating lease expense (aka cash rent payments)
The simplest way to make them comparable is to add back the lease liability to EV value of IFRS company and pairing EV + Lease Liability (this includes both operating and finance leases as there’s no distinction under IFRS) with Post IFRS 16 EBITDA
For companies using GAAP you’d need to add back cash rent expense (operating lease expense) to EBITDA in order to get EBITDAR. You also include the operating lease liability (and it also makes sense to include the finance lease liability) to EV here. So your multiples should look something like this:
IFRS:
(EV + Lease Liability) / Post IFRS 16 EBITDA
GAAP:
(EV + Finance and Operating Lease Liabilities) / (EBITDA + Operating Lease Expense or cash rent payments)
I think this is the most elegant way to make them comprable based on uniform reporting standards. Albeit some companies choose to disclose more information than they are required to.
Understood how you would do that for historical numbers. But how can you do it for forecasts? Especially given most of the broker notes are pre IFRS 16 for US companies? Is looking at the leases commitment for future years a good proxy as adjustment?
Same way you would project any other number and there’s no straight answer. (i) it depends on the business and the nature of the leases, (ii) historical operating lease payments are good proxy. You can simply apply a growth rate and assume the company will continue leasing similar assets / equipment and make a number of assumptions (management can help with that)
Note that an increase increase in operating (cash rent) payments would also require you adjust debt. Brokers usually capitalize it at 8x rent payments and call it a day.
For example if the lease payments are $100, the increase in EV would be $100 x 8. If you assume that cash payments will increase to $200 next year for whatever reason, you need to readjust EV (again, $200 x 8 or any other cap rate assumption you want to make)
Won’t cover the op. lease / IFRS-16 point as it’s covered already.
On R&D capitalization for SaaS businesses for instance, under IFRS you are allowed to capitalize (e.g. book it as intangibles capex and then amortize over time), whereas generally under GAAP you would just expense.
Thus implications are that assuming all else equals post IFRS EBITDA (assuming they do capitalize R&D) will be greater than US GAAP EBITDAR, due to you taking the “entire hit” of R&D cost in your SG&A for the latter case.
One way to adjust is to do post IFRS EBITDA - capitalized R&D that way it would be comparable
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