Start with the economics, because a lease is borrowing. SkyBridge Air (synthetic) needs an A320neo, and it has two routes. It can buy it for $49.17m with a 6-year loan at 6%, with level annual payments of $10m. Or it can lease it for 6 years at $10m/year. The cash obligations are identical. Either way, $10m goes out the door each year. It's contractually committed and senior to shareholders, and missing it is a default. In both cases the airline has borrowed the aircraft's value and is repaying it with interest. So any accounting that shows the first airline with $49m of debt and the second with none is describing the same animal two ways. Until 2019, that's what accounting did.
Before 2019, an "operating lease" meant no asset and no liability. There was just rent expense and a commitments footnote. Airlines, retailers and hotel chains structured leases to stay operating, and they looked debt-light. Analysts and rating agencies capitalized the leases by hand. A common heuristic was ~7–8× annual rent, or the PV of disclosed commitments. When it issued IFRS 16, the IASB estimated that listed companies carried about US$3.3 trillion of lease commitments, over 85% of it off balance sheet. IFRS 16, ASC 842 and Ind AS 116, all effective around 2019, brought them on. They did it differently, though, and that difference is the trap.
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How do IFRS 16 and Ind AS 116 treat a lease?
IFRS 16 / Ind AS 116 use a single lessee model. Every lease goes on the balance sheet, apart from two exemptions covered below:
- Lease liability = PV of unpaid lease payments. The discount rate is the rate implicit in the lease if it's readily determinable. Otherwise it's the lessee's incremental borrowing rate (IBR), the rate it would pay to borrow the funds to buy the asset over a similar term with similar security. The IBR is what you'll usually see disclosed.
- Right-of-use (ROU) asset = the liability + prepayments + initial direct costs + restoration estimates − incentives. At day one it's usually ≈ the liability.
After that, the liability runs on effective interest, the same bond machinery as the effective interest method. The ROU asset depreciates straight-line over the shorter of the lease term and its useful life. So the P&L shows front-loaded, declining interest plus flat depreciation. There's no rent expense at all.
SkyBridge's lease: $10m/year, 6 years, IBR 6% → liability = ROU = 10 × [1 − 1.06⁻⁶]/0.06 = $49.17m.
| Year | Opening liability | Interest (6%) | Payment | Closing liability | Depreciation | Total P&L expense |
|---|---|---|---|---|---|---|
| 1 | 49.17 | 2.95 | 10.00 | 42.12 | 8.20 | 11.15 |
| 2 | 42.12 | 2.53 | 10.00 | 34.65 | 8.20 | 10.72 |
| 3 | 34.65 | 2.08 | 10.00 | 26.73 | 8.20 | 10.27 |
| 4 | 26.73 | 1.60 | 10.00 | 18.33 | 8.20 | 9.80 |
| 5 | 18.33 | 1.10 | 10.00 | 9.43 | 8.20 | 9.30 |
| 6 | 9.43 | 0.57 | 10.00 | 0.00 | 8.20 | 8.76 |
The table is in $m, with depreciation = 49.17/6. Look at the shape. Total expense starts at 11.15, above the 10.00 cash rent, then declines to 8.76, crossing below rent mid-life. Over six years total expense = 60.00 = total rent. Lifetime cost is identical. Only the timing and the line items move. Now think about a growing lessee, such as an expanding airline or retailer. It's permanently in the early years of its lease portfolio. So IFRS 16 reports persistently higher interest plus depreciation, and lower net income, than the old rent world did, with no change in cash.
How does ASC 842 treat a lease?
US GAAP takes another route. ASC 842 uses a dual model and classifies each lease at commencement. A lease is a finance lease if any one of five criteria holds, and an operating lease otherwise. (1) Ownership transfers by the end of the term. (2) A purchase option is reasonably certain to be exercised. (3) The term is a major part of the remaining economic life (~75% was the traditional bright line). (4) The PV of payments is ≥ substantially all of fair value (~90%). (5) The asset is so specialized it has no alternative use.
- Finance leases work like IFRS 16, with front-loaded interest plus amortization.
- Operating leases are still on the balance sheet, with the same initial liability and ROU. People get this wrong constantly, so it's worth saying plainly: ASC 842 did not leave operating leases off the balance sheet. The difference is in the P&L, which shows one straight-line "lease cost" inside operating expenses. Economically, that's rent. Mechanically, the liability accretes interest as usual, and each period's ROU amortization is a plug (straight-line cost − interest accretion), so the two always sum to level rent.
So the same $10m aircraft lease under ASC 842-operating shows a $49.17m liability and ROU, but a flat $10m annual operating expense. There's no interest line and no depreciation line.
Worked example: one airline under two rulebooks
Now watch the trap work in numbers, with one airline under two rulebooks. Take identical twins. Each has revenue of $100m, cash operating costs of $70m, the single aircraft lease above, and no other debt. Here's year 1:
| Line ($m, year 1) | Twin A — IFRS 16 / Ind AS 116 | Twin U — ASC 842, operating lease |
|---|---|---|
| Revenue | 100.00 | 100.00 |
| Operating costs (fuel, crew, airport) | (70.00) | (70.00) |
| Lease/rent cost inside opex | — | (10.00) |
| EBITDA | 30.00 | 20.00 |
| EBITDA margin | 30.0% | 20.0% |
| Depreciation (ROU) | (8.20) | — |
| EBIT | 21.80 | 20.00 |
| Lease interest | (2.95) | — |
| Pre-tax profit | 18.85 | 20.00 |
| Lease liability on balance sheet (year-end) | 42.12 | 42.12 |
Same airline, same cash. Yet Twin A reports an EBITDA margin ten full points higher. Under IFRS/Ind AS the whole lease cost falls below EBITDA, as depreciation plus interest. Under ASC 842-operating it stays inside EBITDA as rent. Twin A also reports lower pre-tax profit in year 1, because of front-loading. Leverage is worse still. Net debt/EBITDA for Twin A = 42.12/30 = 1.40×. For Twin U it's 42.12/20 = 2.11× if you count the operating-lease liability as debt, and 0.0× if you don't. Plenty of data vendors' "debt" fields leave it out, since ASC 842 presents operating-lease liabilities outside debt. That's three leverage readings of one identical airline.
This isn't hypothetical. When Ind AS 116 arrived in FY20, InterGlobe Aviation (IndiGo) saw its reported EBITDA-level profitability jump and its liabilities swell by tens of thousands of crore. IndiGo is India's largest airline, with a mostly leased fleet. Today it carries lease liabilities of very roughly ₹50,000 crore against revenue of roughly ₹80,000 crore (illustrative, modeled on ~FY25 scale: pull the annual report). Delta Air Lines, a US GAAP reporter, carries operating-lease liabilities in the several-billion-dollar range, with the lease cost inside operating expenses (illustrative, ~FY24/FY25 scale: pull the 10-K). Put IndiGo's "EBITDA margin" next to Delta's and you're comparing apples to accounting.
How do analysts adjust for the two rulebooks?
The fix is EBITDAR. EBITDAR = EBITDA + rent/lease cost, which is earnings before interest, taxes, depreciation, amortization and rent. For Twin U that's 20 + 10 = 30. Twin A has no rent line to add back, so EBITDAR = EBITDA = 30. Both twins come out at 30. The matching leverage metric puts lease liabilities in the numerator: (debt + lease liabilities) / EBITDAR. Airlines, hotels and retailers report EBITDAR for that reason. IndiGo discloses it. US airlines and rating agencies run lease-adjusted metrics. Keep one rule from all this: never compare EBITDA, margins, or EV/EBITDA across the US GAAP / IFRS border, or across the 2019 adoption date, without a lease adjustment.
There's a second trap, in the cash-flow statement. Both twins pay the same $10m, but it lands in different places. Under ASC 842 operating, all $10m goes in CFO. Under IFRS 16 the principal ($7.05m in year 1) goes in CFF, and interest goes in CFO or CFF, as IAS 7 lets the company choose. Under Ind AS 116 with Ind AS 7, interest paid must be financing, so the entire $10m goes in CFF and CFO is untouched. An Indian retailer's CFO therefore looks ~$10m higher than an identical US retailer's, every year, forever. The CFO "improvements" in the adoption year were mechanical. Analysts fix it by defining FCF after all lease payments, or by subtracting lease principal from CFO, before they compare.
Special cases, and what the lease note shows
A few exemptions and edge cases. Both frameworks let you expense short-term leases (≤12 months). IFRS 16/Ind AS 116 also exempt low-value assets such as laptops and small equipment. The IASB drafted with roughly US$5,000-when-new in mind. ASC 842 has no low-value exemption. Variable lease payments linked to sales or usage, like a mall store paying 5% of turnover, are not in the liability. They're expensed as incurred, so turnover-rent businesses still keep real commitments off the liability, and you'll need to read the variable-payment disclosure. Modifications and term reassessments remeasure the liability against the ROU. Lessor accounting was left largely where it was. You'll meet it from the lessor's side on the lessor accounting page, using the same aircraft. While you're here, note that "the old operating/finance split" describes IFRS 16 fairly but understates ASC 842, which carries three lessor outcomes where the old split has two.
When you read the lease note, you'll find the same core disclosures under both regimes. There's a maturity analysis of undiscounted payments, the discount rate, the expense components and the ROU additions. US GAAP spells out the weighted-average IBR and remaining term. In the mini-project you'll rebuild a liability roll-forward from these disclosures.