Lease liability
AccountingThe present value of future lease payments, recognised on the balance sheet under IFRS 16 alongside a right of use asset.
IFRS 16 removed the operating lease category for lessees, so nearly every lease now sits on the balance sheet. The liability is the present value of the payments the company has committed to, discounted at the rate implicit in the lease or the incremental borrowing rate.
It behaves like debt, and is generally treated as debt in the enterprise to equity bridge, because it is a fixed contractual obligation that a buyer inherits. A retailer or airline with a large leased estate can see its apparent leverage rise substantially without any change in how it operates.
The income statement effect is the part candidates miss. A single rent expense becomes depreciation on the right of use asset plus interest on the liability. Both sit below EBITDA, so EBITDA rises, and comparisons against a company still expensing rent are broken unless adjusted.
US GAAP kept the dual model, so an operating lease under ASC 842 still produces a straight line rent expense above EBITDA even though the liability is on the balance sheet. That difference is a live comparability problem in any transatlantic comp set.
Worked example
A retailer commits to 100 a year of rent for ten years. Discounted at 5%, the lease liability is about 772, with a matching right of use asset.
The single 100 rent expense is replaced by roughly 77 of depreciation plus 39 of interest in year one, so 116 of total expense against 100 of cash rent.
EBITDA rises by the full 100, because both replacement charges sit below it. A US GAAP peer with operating leases still shows the 100 above EBITDA, so the two are not comparable unadjusted.