Single lease cost
AccountingThe one straight line operating expense a US GAAP operating lease produces under ASC 842, which keeps rent above EBITDA.
Also written: operating lease cost, straight line lease cost
ASC 842 kept the lessee side split between operating and finance leases that IFRS 16 abolished. A US operating lease still puts a right of use asset and a lease liability on the balance sheet, so the balance sheets look similar under both frameworks, but the income statement does not follow. An operating lease produces a single lease cost, recognised on a straight line basis and presented inside operating expenses.
That one presentational difference is the whole comparability problem. The IFRS reporter has moved the property cost below EBITDA into depreciation and interest. The US reporter has left it above EBITDA. Identical stores, identical rent, and reported EBITDA differs by roughly the full rent.
The trap this creates is specific and easy to fall into. Because the US peer does carry a lease liability on its balance sheet, an analyst building net debt mechanically will add it to enterprise value, while the rent is still sitting inside operating costs in the denominator. The property has now been charged for twice and the multiple is overstated.
There is a second, smaller consequence at the profit line. Straight line recognition means a US operating lease charges a level amount over the term, while the IFRS treatment front loads total expense because interest unwinds fastest early. Over the life of the lease the totals agree; in any single year they do not.
Worked example
Illustrative. A store carries rent of 40 a year. The US reporter shows a single lease cost of 40 inside operating expenses, so EBITDA is 100.
The IFRS 16 reporter shows nothing above the line, then 32 of right of use depreciation and 8 of lease interest below it, so EBITDA is 140 and, before any other depreciation, EBIT is 108 against the US reporter's 100.
Note what survives at EBIT: a residual gap of 8, the interest element. EV/EBIT narrows the distortion sharply without removing it.