Most of the analysis of the IASB’s IFRS 16 rule on lease accounting, which went into effect in January 2019, has been from the audit and accounting side. The impact on both real property and business valuators is often overlooked. None of the international business valuation standards offer guidance for practitioners in this area yet. Still, for certain entities, IFRS 16 could require additional analysis and changed methodologies. Valuers who’ve discussed the rule’s impact on business valuations mention these changes, for instance:
- The discount rate may be different depending on whether the right to use is a positive compared to market values or a negative. The difference occurs because one value is secured and the other may not be.
- Implementation of the new standard is in process, so comps from CapIQ or Bloomberg may not be apples to apples. This makes it much more difficult to apply market approaches to lease asset calculations.
- Right to use calculations need to account for special terms such as renewal provisions and contingent payouts—it’s not just a calculation of whether leases are above or below market.
- Some real estate appraisers believe they’re seeing companies change their market behaviour by signing shorter leases to avoid balance sheet impacts. There’s some concern that this could create new risks to future cash flows, particularly for businesses such as retail where sales are related to space resources.
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