Not every asset used belongs to the company
The official IFRS 16 overview describes recognition by a lessee of a right-of-use asset and a lease liability, with exceptions for certain short-term and low-value items. This does not mean that every agreement with monthly payments contains a lease: the substance and scope of the agreement must be checked separately.
A simplified story of one premises
Suppose that at the start of the educational period the right of use and liability are recognised at 300. During the period, the assumed interest on the liability is 24 and the lease payment is 80. With no other changes, the ending liability is 300 + 24 − 80 = 244. The reduction of the liability principal is 80 − 24 = 56. This is arithmetic illustrating a movement, not a calculation for a real contract.
Suppose separately that depreciation of the right of use for the period is 60. In this model, the expense connected with depreciation and interest is 60 + 24 = 84. It is not equal to the payment of 80. The difference is not an error: liability movement, allocation of the right-of-use cost and cash payment describe different sides of the contract. Taxes, remeasurement and modifications are excluded.
Why can EBITDA change?
If expenses are presented through depreciation and interest, a measure that excludes both categories can look higher than under another presentation of payments. Cash capacity to pay the lease does not grow because line items were renamed. When comparing companies, establish how the lease is reflected in the numerator and included in the debt base. Otherwise, a profit measure may improve while the corresponding obligation is forgotten.
The goal is not to choose one universally correct analytical EBITDA. State the method: which expenses are excluded, whether lease liabilities are included and whether payments are duplicated in the adjustment. For a company with many premises, this can materially affect comparability with a property owner even where sales and store counts are similar.
Cash-flow reporting and a non-cash beginning
IAS 7 separates non-cash investing and financing transactions from the cash-flow statement itself and provides for separate disclosure. The initial appearance of a right of use and a liability should therefore not automatically be treated as a cash purchase of an asset in the same period. Reconcile the acquired resource with the payment instead of assuming equality.
A common error is to subtract the full lease payment from a measure where the same burden has already been included another way, or to exclude the liability from debt while retaining the “improved” profit. Another is to attribute every liability change to new premises. Disclosures about remeasurements, currency and other movements are required; the simple table does not cover them.
What should be read in the notes?
Look for terms, the nature of the assets used, future payments, key assumptions and the liability roll-forward. Compare the lease term with the business planning horizon and possible renewal conditions. Do not call a renewal guaranteed merely because a store has operated at the same location for a long time.
This material does not calculate the discount rate for a real lease or determine whether an exception applies. The [cash-flow statement](/guides/cash-flow-statement/) and [financial-statement adjustments](/guides/financial-statement-adjustments/) provide useful bases. The main result is a consistent interpretation of asset, debt, expense and payment.
A lease portfolio changes without opening new stores
When analysing liability movements, separately seek new contracts, payments and other disclosed changes. Even if the number of premises is unchanged, the amount may move because terms and durations were remeasured. Without the relevant table, do not attribute all growth to aggressive expansion or all decline to closures. Identify the economic event first, then assess its business meaning.
For comparing a lessee network with a property owner, ask the same question. If the issue is capacity to service mandatory payments, retain all relevant burdens. If the issue is operating efficiency, explain how the cost of access to property is treated in both models. Adding lease expense back universally can remove important economic content.
Flexibility also matters. A short contract may reduce fixed future payments while increasing the risk of renegotiation or losing the location. A long contract may provide stable use while creating a fixed burden if demand falls. The balance-sheet balance does not capture the whole symmetry, so the contract and the commercial role of the premises remain part of the analysis.