The publication of IFRS 16 in 2016 and its mandatory application since 1 January 2019 have radically changed the accounting treatment of lease contracts. This development becomes particularly relevant when Belgian companies report in accordance with BE GAAP, whilst investors, buyers and analysts use IFRS-based valuation multiples. Without the appropriate standardisation, this can lead to differences in interpretation and result in valuation outcomes that are not fully in line with economic reality.
As lease contracts form an integral part of many companies’ operations – ranging from property and vehicles to production equipment and IT infrastructure – the reporting framework used has a clear impact on the balance sheet, the profit and loss account, and key financial ratios. The way in which IFRS 16 and BE GAAP present these contracts differs considerably.
In this article, we explain these differences and show how they lead to varying valuation scenarios and why correct standardisation is essential in this context.
When must a lease be recognised on the balance sheet in accordance with IFRS 16?
IFRS 16 is based on a clear principle: leases must be capitalised when the lessee has control over the use of an identified asset over the lease term.
In practical terms, this means that the lessee:
- derives the economic benefits from the use of the asset, and
- has the right to control the use of the asset.
Where these conditions are met, the company must recognise both a “right-of-use asset” and a lease liability.
Exceptions: when is a lease not recognised on the balance sheet under IFRS 16?
IFRS 16 provides for only two express exemptions:
- Short-term leases: lease contracts with a maximum lease term of 12 months, without a purchase option.
These may be recognised in full as expenses in the profit and loss account. - Low-value asset leases: leases of assets with a low individual value (e.g. laptops, small IT equipment).
In addition, non-lease components (such as service or maintenance) are excluded from capitalisation. They are treated as operating costs, but do not constitute an exemption as such.
Under IFRS 16, all other leases must be recognised on the balance sheet.
From lease expense to balance sheet item
IFRS 16 is based on the principle that virtually all leases represent a form of financial liability and therefore belong on the balance sheet. Whereas BE GAAP treats operating leases as off-balance-sheet items, IFRS 16 requires companies to recognise both a “right‑of‑use” asset and a lease liability. This leads not only to an increase in debt, but also to a structural change in the presentation of profitability.
Under IFRS 16, the traditional lease cost is broken down into two separate components: depreciation of the capitalised asset and interest expense on the lease liability. This automatically increases the EBITDA, as the lease cost no longer appears in the operating results. The company therefore appears to be more profitable, even though the underlying cash flow and economic reality remain unchanged.
BE GAAP: simpler, but less transparent
BE GAAP applies a traditional distinction, in which case operating leases are simply recognised as expenses. They remain off balance sheet, which makes both the debt position and the EBITDA appear lower and more transparent. This gives the impression that the company has a leaner structure and is financially more robust, but this perception is mainly a result of the way the figures are presented. From an economic perspective, the lease obligations remain the same.
The impact on valuation: subtle but strategically important
In M&A processes, companies are often assessed using market or transaction multiples, historical sector data and peer comparisons. When IFRS and BE GAAP figures are compared without standardisation, this results in a distorted picture of the valuation.
Under IFRS 16, the EBITDA is actually higher because lease costs are no longer included in the operating results. Under BE GAAP, that cost remains fully included in the EBITDA, resulting in a lower figure. In a valuation model, if the same multiple is used, the enterprise value will be higher under IFRS than under BE GAAP. Conversely, the net financial debt position under BE GAAP will be lower, which will affect the ultimate share value.
In addition, IFRS 16 results in a higher level of net financial debt due to the recognition of lease liabilities. This may give the impression that the company’s leverage is higher than under BE GAAP. Without standardising these differences, figures become incomparable and this leads to inaccurate conclusions in both valuation and negotiation.
To ensure a fair comparison, it is essential to neutralise the effects of IFRS and recalculate lease liabilities. Without these adjustments, a valuation can become structurally skewed, which in competitive transaction environments quickly leads to disputes and price discrepancies.
Key points:
-
IFRS 16 requires virtually all leases to be recognised on the balance sheet, with two exceptions
-
BE GAAP permits operating leases to be treated as off-balance-sheet items
- EBITDA under IFRS 16 > EBITDA under BE GAAP
-
Net financial position (NFP) under IFRS 16 > NFP under EBITDA
- Non-standardised comparisons between IFRS and BE GAAP figures create a distorted picture of valuation
