Before 2019, a company that leased its office space, its retail stores, or its delivery trucks could often keep that lease completely off its balance sheet. The lease payment simply showed up as a rent expense on the income statement, year after year, with no asset and no liability anywhere in sight. IFRS 16 (and its US GAAP counterpart, ASC 842) ended that for almost all leases, and the change has real consequences for how analysts read a company's financial statements — especially EBITDA and leverage.
What IFRS 16 Actually Changed
Under the old standard (IAS 17), leases were split into two buckets: finance leases, which were economically similar to buying the asset with a loan and were capitalized, and operating leases, which were treated as pure rental agreements and expensed straight-line with no balance sheet impact at all.
IFRS 16 removed that distinction for lessees. With narrow exemptions for short-term leases (12 months or less) and low-value assets, every lease now creates two things at inception: a lease liability, equal to the present value of future lease payments, and a right-of-use (ROU) asset, representing the lessee's right to use the underlying property over the lease term.
Why EBITDA Goes Up
This is the mechanic that trips up a lot of candidates in interviews. Under the old rules, the full lease payment sat in operating expenses, reducing EBITDA dollar-for-dollar. Under IFRS 16, that rent expense disappears from opex entirely. In its place, the ROU asset is depreciated (a D&A line, which sits below EBITDA) and the lease liability accretes interest (a financing cost, also below EBITDA). The cash paid to the landlord hasn't changed at all — only where it shows up in the income statement has.
The result: EBITDA is structurally higher after adopting IFRS 16, purely as an accounting reclassification, not because the business got any more profitable. Anyone comparing a company's EBITDA before and after the transition — or comparing two companies that lease to different degrees — needs to know this before drawing conclusions from the multiple.
Why Leverage Doesn't Automatically Improve
A higher EBITDA might suggest lower leverage on a Net Debt / EBITDA basis. But the new lease liability is typically added to Net Debt at the same time, and depending on the size and duration of the leases, the increase in debt can outpace the increase in EBITDA — meaning leverage ratios can actually get worse after adopting IFRS 16, not better. Our IFRS 16 lease accounting case works through a full numeric example of exactly this: a five-year lease that raises reported EBITDA by $100,000 while pushing Net Debt / EBITDA from 1.50x up to 1.63x.
How This Connects to the Rest of the Statements
IFRS 16 doesn't exist in isolation — it's really an extension of the same logic tested in the EBITDA bridge from net income and in the capitalize-vs-expense decision: whenever a cost gets pulled off the income statement and turned into an asset and a liability instead, EBITDA, leverage, and the cash flow statement all move in ways that are easy to get backwards under interview pressure. If you haven't nailed down how the balance sheet fits together yet, that's the right place to start before tackling lease accounting specifically.
The Interview Angle
Interviewers rarely ask "what is IFRS 16" in isolation — they use it to test whether you understand why accounting reclassifications change reported metrics without changing the underlying economics. Expect follow-ups on EBITDA normalization, on how the cash flow statement splits the lease payment between operating and financing activities, and on the short-term/low-value exemptions that let some leases stay off the balance sheet entirely.