Since the introduction of AASB 16 in 2019, valuing businesses using market multiples, especially EV/EBITDA, requires a new level of care. The accounting change does not alter business fundamentals, but it does reshape reported earnings and leverage in ways that can distort valuation if not handled consistently.
Under the old IAS 17, operating leases were off-balance sheet and recognised as an operating expense.
For reporting entities, AASB 16 brought operating leases onto the balance sheet as a right-of-use asset and a lease liability, replacing operating lease expenses with depreciation and interest.
The result is that EBITDA artificially rises post AASB 16, and lease expenses such as rent on properties disappear.
The core principle remains that AASB 16 doesn’t change value, it changes presentation.
The key to multiple-based valuation is consistency between the earnings metric and the multiple applied.
For example:
• If applying an EBITDA multiple to a business reporting under AASB 16, use comparable peers that also apply the standard.
• Another option is to normalise the AASB 16 depreciation & interest back to an operating expense to align with pre AASB 16 reporting and use multiples from peers not affected by the standard.
At DMA, we have seen a range of approaches across transactions. The key is ensuring consistency in metrics used and presenting the underlying performance of the business in a transparent and consistent manner where AASB 16 is involved.
It is important that the selected approach is carried through the entire transaction process, ensuring it is reflected consistently in completion accounting and/or earnout calculations that feature in the binding transaction documentation.
