LBO and IFRS Leases

Ah, navigating the jungle of LBO modeling with IFRS leases, are we? Let's swing through this together, branch by branch.

First off, your approach to handling IFRS leases in an LBO model is on the right track. Given the scenario where the company has Right-of-Use (RoU) assets of 500 and lease liabilities of 490, here's how you might refine your approach based on the most helpful WSO content:

1. Sources & Uses (S&U) Table Adjustments:

   • Sources: Indeed, you'd account for the refinancing of lease liabilities here. This is where you'd show any new debt taken on to refinance existing leases.
   • Uses: Include the payoff of existing lease liabilities as part of the transaction costs. This reflects the cash outflow needed to settle these obligations as part of the acquisition.

2. Net Debt and Purchase Price Allocation:

   • Correct, lease liabilities are included in net debt. This impacts the overall purchase price and, subsequently, the calculation of pro forma goodwill. The inclusion of lease liabilities in net debt ensures that you're capturing the true cost of acquiring the company.

3. Balance Sheet (BS) M&A Adjustments:

   • When adjusting the balance sheet, "killing" the existing lease liabilities and RoU assets simplifies the initial adjustments. However, remember to reflect the refinancing of these leases accurately. This means introducing the new lease liabilities (and corresponding RoU assets) that result from the refinancing.

4. Modeling Lease Liabilities and RoU Assets Going Forward:

   • Treating lease liabilities similarly to debt is a practical approach for simplicity. However, for RoU assets and lease liabilities to differ, you'd need to model the depreciation of RoU assets separately from the amortization of lease liabilities.
   • For RoU assets, consider straight-line depreciation over the lease term. For lease liabilities, model the interest expense and principal repayment based on the terms of the refinanced leases.

5. Interest Expense and Cash Flows:

   • Don't forget to include the interest expense on the lease liabilities in your income statement. This affects net income and, by extension, cash flows from operations.
   • In the cash flow statement, the principal portion of lease payments is reflected in financing activities, while interest can be part of operating activities.

Remember, the key to a realistic and simple model is clarity and consistency in your assumptions. Make sure to document your assumptions clearly, especially regarding the terms of the refinanced leases and the depreciation/amortization methods used.

Swinging through the financial modeling jungle can be complex, but with a clear map (or model structure) and a keen eye for detail, you'll navigate it like a pro. Keep those bananas handy for energy, and happy modeling!

Sources: Adjusting EV for Operating Lease Liabilities?, Beyond the guide: a list of real interview technical questions, LBO and leases, Creating own LBO assumptions, Paper LBO Model for SA interviews?