Ifrs 16 Impact On Loan Agreements

Despite these concerns and the reluctance of most market participants to adopt the new standards, some market participants may see a smooth transition to IFRS 16. Major business backers may have used EBITDAR (the “R” for “before rental costs”) instead of EBITDA. These parties will see a position similar to that of IFRS 16 because, unlike position IAS 17 (where the payment of operating rent reduces the number of EBITDA as these were operating expenses), it already denies the impact of assets on rents and thus helps to reduce the impact of operating leases on balance sheets. However, for most borrowers, this will not be the measure adopted and the parties should continue to consider (and ultimately accept) the change in accounting standards. It is interesting to note, however, that some proponents of change have suggested that it is not enough to accept the position and that IFRS 16 should instead be seen as the much-needed catalyst for further changes in the market. Such a change could involve using EBITDA as a key performance indicator, since the test is purely subjective (a figure that is derived from a borrower as a clear position); this argument is reinforced by growing discussions and concerns about the adoption of EBITDA in the investment agreement negotiations. Instead, some have suggested using cash flow or operating cash flow as a preferred test measure, as they could be less easily manipulated. Only time will tell if these are viable options. For a company with a significant value of leasing, net debt will increase, but also EBITDA. This means that any alliance using one of these two could be affected. As a result, alliances such as interest rate hedging, leverage and cash flows could be affected. Case-by-case modelling would be required to fully assess the impact of a reclassification of leasing contracts under IFRS 16. In addition, companies with ongoing or planned financing transactions should carefully analyze the language in their debt documentation to ensure that the definition and ratio structure is appropriate in light of IFRS 16.