Strategic English for IFRS 16 and Ratio Calculations: Clear Wording for Lease-Adjusted Metrics

1) Anchor the concept: What IFRS 16 changes and why wording matters

IFRS 16 fundamentally changes how companies present leases. Under previous standards, many operating leases sat off the balance sheet, and the expense appeared as a single line in operating costs. IFRS 16 moves most leases on‑balance sheet by recognizing a right‑of‑use (ROU) asset and a corresponding lease liability. On the income statement, what used to be a single operating lease expense is split into two components: depreciation of the ROU asset and interest expense on the lease liability. This mechanical shift has important consequences for metric interpretation, especially for EBITDA, leverage, and coverage ratios.

Because the operating lease expense is removed from operating costs above EBITDA, EBITDA usually increases under IFRS 16. However, interest expense increases as lease interest is now recognized below EBITDA, and depreciation also increases due to the ROU asset. Leverage metrics that use net debt can increase if lease liabilities are included. Coverage metrics can either strengthen or weaken depending on how the denominator (interest) and numerator (EBITDA or EBITDAR) are specified. In short, the numbers change not only in magnitude but also in composition.

This is why wording matters. In corporate finance, there are often multiple “worlds” of definitions in parallel use. If you do not state clearly which world you are using, stakeholders will make their own assumptions, which may not match yours. This creates confusion at best and misinterpretation at worst. A sentence that looks precise—“Leverage is down to 3.2x”—is not precise unless it clearly states whether lease liabilities are included in net debt and whether the numerator reflects an IFRS 16 EBITDA uplift. Ambiguity can lead to disputes with lenders, misalignment with rating agencies, and inconsistent messaging with investors.

Think of precise wording as a control system. It ensures that every reader applies the same rulebook to your numbers. Exact language about numerator, denominator, the treatment of leases, and the time period prevents unintentional mixing of apples and oranges. Under IFRS 16, this discipline becomes more important because the accounting has changed while many contractual and analytical definitions have not. Your wording connects these two realities so that users can reconcile them reliably.

2) Define and compare lease-adjusted leverage and coverage ratios with explicit calculation language

In practice, there are three common “worlds” of definitions for performance and credit metrics. You must signal which one you are using before you state any ratio.

• Rating‑agency world (adjusted, lease‑capitalized): Agencies often adjust reported figures to a common economic basis. They typically capitalize lease commitments and compute lease‑adjusted metrics. Even after IFRS 16, agencies may apply their own adjustments to reflect consistent treatment across issuers and currencies. Their definitions may include lease liabilities in adjusted debt and may use EBITDAR (EBITDA before rent) or other variants when comparing across time and accounting regimes.

• Covenant world (as defined in agreements): Loan and bond covenants use definitions frozen at signing. These may still refer to “operating lease expense” or specify rent add‑backs, regardless of IFRS 16. Covenant EBITDA may therefore differ from IFRS‑reported EBITDA. Covenant net debt might exclude lease liabilities or treat them in a specified way. You must quote covenants exactly and compute numbers according to those contractual definitions, even if accounting standards evolve.

• Management/IFRS‑reported world: This is the language of your financial statements and management discussion. IFRS 16 raises EBITDA, increases depreciation and interest, and adds lease liabilities to the balance sheet. Management may choose to present alternative performance measures (APMs) to bridge to prior periods or to show lease‑adjusted views. Every APM should be defined explicitly and reconciled to IFRS figures.

The core of lease‑adjusted metrics is the substitution of the old operating lease expense with depreciation and lease interest. This affects both the numerator and the denominator of key ratios.

• Leverage ratios: These compare a measure of earnings to a measure of debt. Under lease‑adjusted definitions, the numerator is often EBITDA (IFRS 16), while the denominator may be net debt including lease liabilities. Precise wording should state whether lease liabilities are included in net debt and whether cash includes restricted cash. A common lease‑adjusted leverage formulation is “Net debt including lease liabilities divided by EBITDA after IFRS 16.” Another approach, when comparing with pre‑IFRS histories or rating‑agency frameworks, is “Adjusted debt (including present value of lease commitments) divided by EBITDAR.” Here, the numerator includes capitalization of leases, and the denominator removes rent from the expense base to restore comparability.

• Coverage ratios: These assess the ability to cover interest with operating earnings. Under IFRS 16, interest expense includes lease interest. If you use “EBITDA/interest,” clarify whether interest includes lease interest and whether non‑cash interest items are included. In rating‑agency frameworks, “EBITDAR/interest” is common when rent is reclassified into debt, with a rent factor applied to normalize interest. In IFRS‑aligned management reporting, “EBITDA/interest (including lease interest)” is often used to reflect the reported P&L structure. The key is to declare the content of both numerator and denominator so users know whether rent has been added back and whether lease interest is part of the coverage burden.

Explicit calculation language removes ambiguity:

• State the numerator precisely: “EBITDA after IFRS 16, including lease depreciation add‑backs embedded in EBITDA” or “EBITDAR (EBITDA plus operating lease expense).” Avoid generic “EBITDA” without a lease qualifier.
• State the denominator precisely: “Net debt including lease liabilities” or “Interest expense including lease interest recognized under IFRS 16.” If you exclude lease liabilities, say so plainly and justify why (e.g., covenant definition).
• State scope and period: “LTM to 30 June 20XX,” “FY20XX reported,” or “pro forma for acquisitions and disposals.” Period clarity is essential when IFRS 16 adoption timing affects comparability.

3) Apply: step-by-step sample calculations including sensitivity statements

When you guide readers through calculations, structure the steps so they can trace each adjustment. A clear path avoids mixing elements from different worlds.

• Begin by naming the framework: “Management/IFRS‑reported” or “Covenant as‑defined” or “Rating‑agency adjusted.” This sets expectations for what follows.
• Define the numerator: specify whether EBITDA is after IFRS 16 and whether any add‑backs (exceptional items, restructuring) are included. State explicitly how lease expense is treated: under IFRS 16, it no longer appears above EBITDA; instead, depreciation and lease interest replace it. If you use EBITDAR, say that you add back rent to EBITDA to neutralize lease presentation.
• Define the denominator: for leverage, state whether net debt includes lease liabilities, which lease liabilities (finance and operating under legacy terms), and whether you net unrestricted cash only. For coverage, state the interest components: bank interest, bond coupons, lease interest, and any other recurring finance costs.
• Present the ratio with both label and content: “Lease‑adjusted leverage = Net debt (incl. lease liabilities) / EBITDA (IFRS 16). Coverage = EBITDA (IFRS 16) / Interest (incl. lease interest).” Keep the labels consistent across documents.

Sensitivity statements are especially important in the IFRS 16 context because changing the inclusion of lease interest or lease liabilities can move ratios meaningfully. Use direct language to frame these effects:

• Clarify the effect of including lease liabilities in net debt: “Including lease liabilities in net debt increases leverage relative to an excluding definition; the magnitude reflects the size and duration of lease commitments.” This prepares readers for a higher denominator.
• Clarify the effect of IFRS 16 on EBITDA: “Under IFRS 16, EBITDA is mechanically higher than under pre‑IFRS lease accounting because operating lease expense is removed from operating costs.” This warns readers not to interpret the uplift as an operational improvement.
• Clarify the effect on coverage: “When lease interest is included in interest expense, coverage ratios are lower than when it is excluded. This reflects the financing character of leases under IFRS 16.” This highlights why some comparisons require normalization.
• Clarify period comparability: “Ratios for periods before IFRS 16 are not directly comparable to periods after adoption without adjustments. Use consistent treatment to avoid trend distortion.” This encourages readers to align definitions across time.

These statements do not show the arithmetic; rather, they explain how each definitional choice moves the numbers. The language equips your audience to interpret your ratios correctly and to compare them with alternative presentations from peers, agencies, or covenants.

4) Communicate: template phrases for disclosures, covenant headroom, and Q&A contrasts (rating‑agency vs. covenant)

Strong communication turns technical correctness into stakeholder confidence. Template phrases help you maintain clarity and consistency across filings, presentations, and conversations.

• Disclosures in reports and presentations:

  • “Unless stated otherwise, metrics are presented on a management/IFRS‑reported basis. EBITDA reflects IFRS 16 (lease expense reclassified into depreciation and interest). Net debt includes lease liabilities. Interest expense includes lease interest.”
  • “For comparability, we also provide lease‑adjusted metrics consistent with rating‑agency methodologies. Adjusted debt includes capitalized leases; EBITDAR adds back rent to EBITDA. See Appendix A for reconciliations.”
  • “Covenant metrics are calculated strictly in accordance with the definitions in the Facilities Agreement dated [date]. These may differ from IFRS‑reported figures due to the treatment of leases and specified add‑backs.”

• Covenant headroom language:

  • “Under the Facilities Agreement definition, leverage is [x]. This definition excludes lease liabilities and uses EBITDA as defined therein. Headroom to the maximum permitted level of [y] is [z].”
  • “Interest cover for covenant purposes is [x], calculated using interest as defined in the agreement, which excludes lease interest. IFRS‑reported interest coverage, which includes lease interest, is [x’]. We monitor both to ensure compliance and transparency.”
  • “Definitions are unchanged by IFRS 16 under the agreement’s frozen GAAP clause. We provide reconciliations to IFRS‑reported metrics to support comparability.”

• Roadshow and investor Q&A contrasts:

  • “Rating‑agency view: Our lease‑adjusted leverage uses adjusted debt including lease liabilities and the agencies’ capitalization of leases. The numerator is consistent with their published methodology; the denominator is EBITDAR to neutralize rent.”
  • “Covenant view: Our bank agreements define leverage without lease liabilities. We report headroom on that basis and comply comfortably.”
  • “Management view: We lead with IFRS‑reported EBITDA and interest, which include lease effects under IFRS 16. Where helpful, we present supplemental metrics that align with agency adjustments, with clear labels and reconciliations.”

• Clarity on inclusions/exclusions:

  • “Lease liabilities: included in net debt for management and rating‑agency presentations; excluded for covenant calculations.”
  • “Lease interest: included in IFRS‑reported interest expense and coverage; excluded in covenant interest cover per agreement.”
  • “Rent add‑back: applied only in rating‑agency style EBITDAR to maintain comparability with lease‑capitalized debt.”

• Period scope and comparability:

  • “All ratios are presented on an LTM basis to 30 June 20XX unless otherwise stated. IFRS 16 was effective from 1 January 20XX; prior periods are adjusted where indicated to ensure consistent treatment.”
  • “Pro forma adjustments reflect the full‑year effect of acquisitions and disposals completed during the period; lease commitments associated with these transactions are included consistently.”

The goal in all these phrases is to prevent silent assumptions. You remove ambiguity by explicitly labeling: (1) which world you are in; (2) what is in the numerator and denominator; (3) how leases are treated; and (4) what period and scope apply. You also explain why an alternative presentation may differ. That way, even if your stakeholders approach the numbers with different frameworks, they can reconcile them quickly.

Closing guidance

Under IFRS 16, leases are brought onto the balance sheet and rental costs are split between depreciation and interest. This shift changes leverage and coverage ratios mechanically. To preserve clarity and credibility, always declare the world of definition you are using—rating‑agency adjusted, covenant as‑defined, or management/IFRS‑reported—and then specify the numerator, denominator, lease treatment, and period. Use consistent labels on every page and in every conversation. Provide reconciliations when you move between worlds. Finally, accompany the ratios with short, direct sensitivity statements so readers understand how including lease liabilities or lease interest affects the outcome. This disciplined English framing turns complex accounting changes into clear, decision‑useful metrics for all audiences.