Leases: operating, finance and the EV question
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
9 min read · updated October 14, 2026
Two airlines fly the same planes on the same routes. One owns its fleet, financed with bank debt. The other leases every plane. Same business, same risk, same cash going out the door each year. Should they look the same in a valuation?
They should, and making them look the same is the whole point of lease accounting. It also happens to be where a lot of interview candidates get tangled, because the answer depends on which accounting standard you are under and which type of lease it is. Untangle three ideas and the rest follows: what goes on the balance sheet, what goes on the income statement, and what you do with it in enterprise value.
Everything is on the balance sheet now
Before 2019, US companies had two kinds of leases. Capital leases were treated like a purchase financed with debt and sat on the balance sheet. Operating leases were treated as rent: an expense each period and nothing on the balance sheet. A retailer could have billions of dollars of store commitments that never appeared as a liability.
ASC 842 in the US and IFRS 16 elsewhere closed that gap. Today a company that leases almost anything for more than twelve months records two items on day one:
- A lease liability: the present value of the lease payments it has committed to.
- A right-of-use asset: its right to use the asset for the term, which starts out at roughly the same amount.
This happens for both operating and finance leases under US GAAP. The balance sheet no longer tells the two types apart in any important way. The difference lives on the income statement and the cash flow statement.
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Frequently asked
- What is the difference between an operating lease and a finance lease?
- Under US GAAP both put a right-of-use asset and a lease liability on the balance sheet. The difference is the income statement. An operating lease shows one straight-line lease cost inside operating expenses, so it reduces EBITDA. A finance lease splits the cost into amortization of the asset and interest on the liability, both below EBITDA, and the total expense is higher in the early years. A finance lease is one that is effectively a purchase, for example because it covers most of the asset's life or transfers ownership.
- How does IFRS 16 treat leases differently from US GAAP?
- IFRS 16 has one model for lessees. Nearly every lease is treated like a US finance lease, with amortization and interest, apart from short-term and low-value leases. So an IFRS company's EBITDA excludes almost all of its lease cost, and its EBITDA looks higher than an otherwise identical US company with operating leases.
- Should you count leases as debt when calculating enterprise value?
- It depends on the metric, and the rule is consistency. If the EBITDA you are using has already been reduced by the lease cost, as with a US company's operating leases, leave the lease liability out of enterprise value. If the metric excludes the lease cost, as with EBITDAR, an IFRS 16 company or a finance lease, include the lease liability in enterprise value. Finance leases are generally treated as debt.
- Do leases affect cash flow differently depending on the type?
- The total cash paid is the same, but where it shows up differs. A US operating lease payment sits entirely in cash from operations. A finance lease payment is split: under US GAAP the interest part is operating and the principal part is financing. So the same rent payment produces higher operating cash flow when the lease is a finance lease.
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