Impact on valuation due to changes in lease accounting

The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016, effective for financial periods beginning on or after 1 January 2019. IFRS 16 replaces the previous leases standard, IAS 17 Leases. Similarly, The Accounting Standard Board in India issued an exposure draft on IndAS116 Leases, which was approved by the Ministry of Corporate Affairs on 30 March 2019, effective from 1 April 2019. IndAS-116 replaces the IndAS-17 Leases.

Although accounting policies should not significantly affect economic valuations, we foresee practical challenges that IFRS 16/IndAS 116 can have over valuation outcomes. The publication highlights few areas of attention while carrying out business valuations and M&A deals.

Key highlights

1. Key differentiator between old and new lease accounting standard
2. Key Valuation Considerations

1. Impact on discounted cash flow (DCF) method
2. Impact on Ratio analysis
3. Impact on M&A and Private Equity Deals
4. Impact on market multiple approach
5. Case Studies

Things to consider while carrying out valuation analysis

1. Consistency in applying lease adjustments to cash-flows and estimating discount factor.
2. Similar approach to be followed while determining carrying value and recoverable value while carrying out Impairment Assessments.
3. Application of replacement capital expenditure while estimating terminal / perpetuity value
4. Interpretation of Gearing ratios and EV market multiples due to change in lease accounting
5. Challenges in comparing peer sets which do not follow IFRS or IndAS accounting policies with those following the same.