Answers / Financial Due Diligence
How do you handle IFRS 16 lease liabilities in a CFDF deal?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Under IFRS 16, operating leases are capitalized: right-of-use asset + lease liability on the balance sheet, depreciation + interest in P&L.; In FDD: typically exclude IFRS 16 lease liabilities from net debt and instead analyze leases on a pre-IFRS 16 basis (rent expense in EBITDA). The SPA should clearly define whether lease liabilities are included in the debt definition. This is a common negotiation point.
WHAT INTERVIEWERS LISTEN FOR
- ✓Capitalization of operating leases
- ✓Exclude from net debt
- ✓Pre-IFRS 16 analysis
- ✓SPA debt definition
- ✓Negotiation point
COMMON MISTAKES
- ✗Including lease liabilities in net debt
- ✗Ignoring SPA definition
- ✗Treating as operating lease
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