When most finance professionals think about IFRS 16, they picture a single mechanical effect: operating leases move from the income statement onto the balance sheet, EBITDA goes up, and debt goes up. What that shorthand misses is that the size of the effect depends heavily on the kind of lease a company relies on, and that dependence plays out very differently across industries.
What IFRS 16 actually changed
Before IFRS 16, a company that leased office space, retail stores, or aircraft typically expensed the rent straight through operating costs — the lease never touched the balance sheet unless it met strict "finance lease" criteria. IFRS 16 (effective for annual periods beginning on or after 1 January 2019) ended that distinction for lessees: with narrow exemptions for short-term and low-value leases, essentially every lease is now capitalized. The lessee recognizes a right-of-use asset and a corresponding lease liability equal to the present value of future lease payments, discounted at the lessee's incremental borrowing rate.
The mechanical result is that the lease expense disappears from operating costs (above the EBITDA line) and is replaced by two new line items below it: depreciation of the right-of-use asset, and interest expense on the lease liability. That single shift — moving a cost from above EBITDA to below it — is why IFRS 16 adoption caused a wave of EBITDA increases across the market in 2019, without any change in the underlying economics of the business.
Why the same standard hits industries differently
The size of the lease liability created is a function of two things: the annual lease payment, and how long that payment stream runs, discounted at the applicable rate. That second variable — lease term — is easy to underweight, but it can dominate the calculation. A company with long-duration leases (aircraft, telecom towers, ground leases) can end up with a much larger capitalized liability than a company with a bigger annual payment but a shorter lease term, simply because more years of payments are being pulled onto the balance sheet.
This is exactly the mechanic worked through in detail, with real numbers, in our case comparing an airline, a retailer, and a telecom operator under IFRS 16: the telecom's 15-year tower leases produce a larger balance sheet liability than the airline's 12-year aircraft leases, even though the telecom's annual lease payment is smaller. Meanwhile, the EBITDA uplift (which depends only on the payment size relative to the existing EBITDA base) moves in a completely different pattern, hitting the retailer hardest in percentage terms and the telecom least.
Why this matters for credit and equity analysis
The practical consequence is that Net Debt/EBITDA — one of the most widely quoted leverage metrics in credit analysis and comps work — is not comparable across companies unless everyone is capitalizing leases the same way. A lease-heavy business like an airline or a telecom operator can look artificially similar in leverage terms to a lease-light software company if an analyst is not careful to check what fraction of reported debt is lease-related. Getting this right means separating the balance sheet effect (driven by lease term and discount rate) from the income statement effect (driven by payment size relative to EBITDA) rather than assuming they move together.
For a step-by-step refresher on the basic IFRS 16 mechanics for a single company — before layering on the cross-sector comparison — see our companion case on IFRS 16 lease accounting fundamentals.