"Walk me through IFRS 16" is a favorite accounting question in interviews for a simple reason: it's easy to recite the definition and completely fail to show you understand the consequences. Interviewers care less about whether you can define a right-of-use asset and much more about whether you can calculate the numbers and explain what happens to EBITDA and leverage afterward. Here's a structure that covers both.
Step 1: State the Mechanic in One Sentence
Open with the core idea before diving into formulas: under IFRS 16, almost every lease creates a lease liability (the present value of future payments) and a matching right-of-use (ROU) asset at inception, replacing the old operating-lease treatment where nothing appeared on the balance sheet at all.
Step 2: Show You Can Actually Calculate It
If the interviewer gives you numbers — lease term, annual payment, discount rate — don't just describe the formula, use it. The lease liability is a standard annuity present value:
Lease Liability = Payment × [1 − (1 + r)^-n] / r
For example, a 5-year lease with $100,000 annual payments at a 5% (0.05) discount rate produces a lease liability (and matching ROU asset, assuming no direct costs or incentives) of roughly $432,948. Our IFRS 16 lease accounting case walks through this exact example, including Year 1 depreciation and interest expense.
Step 3: Get Ahead of the EBITDA Follow-Up
This is where most candidates lose points. Once you've stated the lease liability and ROU asset, proactively address what happens to EBITDA: the old rent expense disappears from operating expenses and is replaced by depreciation and interest, both of which sit below the EBITDA line. The cash paid doesn't change — only its classification does — but EBITDA still comes out higher than it would have under the old rules. Naming this before the interviewer asks is a strong signal that you understand the standard rather than just having memorized it, similar to the reasoning tested in EBITDA normalization.
Step 4: Don't Stop at EBITDA — Talk About Leverage
A sharp interviewer will immediately ask "so does leverage improve?" The honest answer is: not necessarily. The new lease liability usually gets added to Net Debt at the same time EBITDA rises, so Net Debt / EBITDA can move in either direction depending on the size of the lease relative to the rest of the balance sheet. Walking through a quick before/after ratio — as in the case example, where Net Debt / EBITDA actually rises from 1.50x to 1.63x — shows you're thinking about the full picture, not just the income statement line.
Step 5: Know the Exemptions and the Cash Flow Statement Wrinkle
Two follow-ups come up constantly:
Exemptions: short-term leases (12 months or less) and low-value assets can still be expensed straight-line with no balance sheet recognition — know this so you don't overstate how universal the rule is.
Cash flow statement: total cash paid is unchanged, but the split shifts. The interest portion of the payment stays in operating cash flow, while the principal portion moves to financing activities — meaning operating cash flow looks better and financing cash outflow looks worse than under the old treatment, even though nothing about the business changed.
Putting It Together
A strong 90-second answer moves in this order: define the mechanic → calculate the lease liability and ROU asset → explain the EBITDA effect unprompted → address leverage → mention the exemptions if there's time. That sequence mirrors how the broader interview toolkit is tested — see goodwill creation and impairment for a similar pattern of "recognize an item, then explain the P&L and leverage consequences" reasoning applied to a different accounting topic.