Introduction
Vodafone does not judge its businesses on earnings before interest, tax, depreciation and amortization (EBITDA). Its segment measure is Adjusted EBITDAaL, EBITDA after leases, which deducts the depreciation of leased assets and the interest on lease liabilities. In the year to March 2026, that measure came to €11.4 billion, after €3.7 billion of lease depreciation and €0.6 billion of lease interest. Added back, those two items would have produced an EBITDA figure of more than €15.6 billion, about 38% higher, for exactly the same business.
- EBITDAaL
EBITDA after leases: earnings before interest, tax, depreciation and amortization, less the depreciation of right-of-use assets and the interest on lease liabilities. IFRS reporters with large leases, particularly telecom operators, publish it to show a profit measure comparable with the pre-IFRS 16 basis, on which rent reduced EBITDA.
The gap exists because of IFRS 16, the leases standard of International Financial Reporting Standards (IFRS), which since 2019 has required companies reporting under IFRS to account for almost every lease as if they had borrowed money to buy the asset. Rent disappears from operating expenses, replaced by depreciation and interest, both of which sit below EBITDA. US generally accepted accounting principles (US GAAP) took a different path in Accounting Standards Codification (ASC) 842: under the ASC 842 lessee model, leases also come onto the balance sheet, but most remain operating leases with a single rent-like cost above EBITDA. For bankers comparing companies across the two frameworks, that one difference can move EBITDA, leverage and cash flow by large amounts.
One Model for Every Lease
IFRS 16 has no lessee classification. At commencement, a lessee records a lease liability equal to the present value of the lease payments not yet paid, discounted at the rate implicit in the lease or, more often, its incremental borrowing rate. It records a matching right-of-use asset, measured at the liability plus initial direct costs, prepaid rent and any estimated cost of restoring the site, less incentives received.
- Right-of-use asset
The lessee's right to use a leased asset over the lease term, recognized on the balance sheet at commencement. Under IFRS 16 it is depreciated, usually on a straight-line basis, over the shorter of the lease term and the asset's useful life (the full useful life if ownership is expected to pass to the lessee), and tested for impairment like property, plant and equipment.
After commencement, the two sides are accounted for separately, as they would be for a purchased asset financed with a loan. The asset is depreciated, usually straight line. The liability accrues interest at the discount rate and is reduced by each payment. The result is the treatment US GAAP reserves for finance leases, explained in operating vs finance lease classification, applied to stores, offices, aircraft, network sites and vehicles alike.
The Two Exemptions
The standard allows two optional exemptions, under which lease payments are expensed straight line in operating costs and nothing is recorded on the balance sheet:
- Short-term leases: leases with a term of 12 months or less at commencement and no purchase option, elected by class of asset.
- Low-value assets: leases of assets that are of low value when new, such as laptops, phones and small office furniture, elected lease by lease.
The International Accounting Standards Board (IASB) had in mind assets worth around US$5,000 or less when new, and the test depends on the asset, not on the size of the lessee, as KPMG's guide to the short-term and low-value exemptions explains. The exemptions matter less than they might seem. Most large lessees' commitments are in property and major equipment, far above the low-value threshold and on terms well beyond a year. Some companies decline the exemptions altogether: Vodafone states in its annual report that it applies neither.
Lease Term and Remeasurement
The size of the liability depends on the lease term: the non-cancellable period plus any extension periods the lessee is reasonably certain to use, and any termination periods it is reasonably certain not to use. For a telecom operator renting mast sites or a retailer with renewable store leases, that judgment can add years of payments to the liability. It is revisited when a significant event within the lessee's control, such as a major investment in a leased site, changes the assessment.
Payments linked to an index or rate, such as rent that rises with inflation, are included in the liability at the current level. When the payments actually change because the index moves, an IFRS 16 lessee remeasures the liability and adjusts the right-of-use asset. A US GAAP lessee does not: under ASC 842 an index change alone does not trigger remeasurement, and the higher payments are expensed as variable lease cost when they occur. For companies with inflation-linked rents, the IFRS liability therefore tracks inflation more closely.
The Same Lease Under Both Frameworks
Suppose a company signs a five-year lease of equipment with payments of $100 at the end of each year, discounted at 5%. The present value of the payments, and so the opening liability and right-of-use asset, is $433. In the first year, the lessee under IFRS 16 depreciates the asset by $87, a fifth of $433, and accrues $22 of interest. A US GAAP lessee for which the same contract is an operating lease records a single lease cost of $100. Holding revenue and other costs equal:
| Line item | ASC 842 operating lease | IFRS 16 |
|---|---|---|
| Revenue | 1,000 | 1,000 |
| Operating costs excluding the lease | (700) | (700) |
| Lease cost | (100) | 0 |
| EBITDA | 200 | 300 |
| Depreciation of right-of-use asset | 0 | (87) |
| Operating profit | 200 | 213 |
| Interest on lease liability | 0 | (22) |
| Profit before tax | 200 | 191 |
Lease of 100 a year for five years, paid annually in arrears, discounted at 5%; opening liability and right-of-use asset of 433. Over the five years, both frameworks recognize 500 of total cost.
EBITDA is $100 higher under IFRS 16, because none of the lease cost is an operating expense. Operating profit is $13 higher, because straight-line depreciation is less than the payment, which also covers interest. Profit before tax is $9 lower in the first year, because interest is highest when the liability is largest; the pattern reverses in later years, and over the full term the two totals match. The fuller three-statement mechanics of both treatments are traced in operating and finance leases on the three statements.
Cash Flow and Leverage
The cash paid on a lease does not change, but its classification does. Under IFRS 16, the principal portion of each payment is a financing outflow. The interest portion follows the company's policy for interest paid generally, which IAS 7 allows to be operating or financing, as Grant Thornton's summary of IFRS 16 presentation sets out. Only payments for short-term and low-value leases and variable payments outside the liability stay in operating cash flow. In the example, the company's operating cash flow is $78 higher than under a US GAAP operating lease if it classifies interest as operating, and $100 higher if it classifies interest as financing.
On the balance sheet, lease liabilities sit alongside other borrowings. Vodafone reports €12.4 billion of lease liabilities within borrowings at March 2026, up from €10.8 billion a year earlier, mainly because of its UK merger with Three, against €11.5 billion of right-of-use assets within property, plant and equipment.
The Scale of the Change
When IFRS 16 was issued, the IASB's effects analysis estimated that listed companies using IFRS or US GAAP had about US$2.18 trillion of off-balance sheet lease commitments in present value terms, and that about 1,145 companies accounted for more than 80% of them. It expected the largest increases in EBITDA and operating margins in airlines, retailers and travel and leisure, the sectors that rent most of their operating assets, and little change in sectors such as healthcare.
Comparing IFRS 16 and US GAAP Companies
The practical problem for bankers is that an IFRS company and a US GAAP peer with similar leases report EBITDA on different bases. There are two ways to put them on the same footing: before lease costs, as in EBITDAR (earnings before interest, tax, depreciation, amortization and rent), or after them, as in EBITDAaL.
| Approach | IFRS 16 company | US GAAP company with operating leases |
|---|---|---|
| Pre-lease basis, as in EBITDAR | Use reported EBITDA; include lease liabilities in debt | Add back operating lease cost to EBITDA; include operating lease liabilities in debt |
| Post-lease basis, as in EBITDAaL | Deduct lease depreciation and interest from EBITDA; exclude lease liabilities from debt | Use reported EBITDA; exclude operating lease liabilities from debt |
Either basis works if it is applied consistently, to the numerator and the denominator of every multiple. The mistake to avoid is mixing them: valuing an IFRS company on EBITDA that excludes lease cost while measuring its enterprise value with debt that excludes lease liabilities overstates its value. The disclosure needed for the post-lease basis, lease depreciation and lease interest, is required under IFRS 16, and many IFRS companies with large leases, such as telecom operators, airlines and retailers, publish a lease-adjusted measure themselves. The broader set of adjustments is covered in adjusting IFRS reporters for US comparisons.
Lessor accounting barely changed under IFRS 16: lessors still classify leases as finance or operating, much as US lessors do. The single model is a lessee model. And presentation will shift again with IFRS 18 and the new income statement, effective in 2027, which requires most companies to classify interest paid as a financing cash flow, removing the policy choice that makes IFRS operating cash flows harder to compare today.
