Long-term leases: the silent impact that changed EBITDA, debt, and management reporting. IFRS 16.

By Rebeca Sequeira

Since its implementation, IFRS 16 Leases has changed how companies present their financial statements. In Costa Rica and the rest of the region, this standard has required a review of management indicators, contracts, and projections, especially in sectors with a high volume of leases, such as hospitality, retail, transportation, and manufacturing.

Today, several years after its adoption, it is a good time to review what has changed in financial analysis, how these changes are reconciled with income tax, and what is coming with IFRS 18, which will mark a new stage in the presentation of business results.

What changed with IFRS 16

Before 2019, many companies recorded their leases "off the balance sheet." That is, they recorded rental payments as an operating expense without showing the future payment obligations on the statement of financial position. With the introduction of IFRS 16, that changed.

The regulation requires that all lease agreements exceeding 12 months be reflected as:

• a right-of-use asset, and

• a lease liability that represents committed future payments.

  
  

The previous system of only recording expenses in profit or loss allowed most operating leases to remain off the balance sheet, obscuring real obligations and resulting in insufficient information and comparability between companies. This standard aims to ensure that financial statements reflect the economic reality of leased assets, showing both the right to use them and the obligation to pay, preventing off-balance-sheet accounting practices and providing clearer information for investors, banks, and decision-makers.

This caused the balance sheets of many companies to grow in both assets and liabilities. The result is a more complete and transparent picture of the company's financial reality.

Effects on financial analysis

The most noticeable change occurred in financial indicators such as EBITDA (earnings before interest, taxes, depreciation and amortization) and net profit.

• EBITDA: Under IFRS 16, rental payments are no longer recorded as operating expenses. Instead, they are recognized as depreciation and interest. This increased the EBITDA of many companies because some of the expense was reclassified as a financial expense.

• Net profit: however, it may be affected in the first years of the contract, since the total expense (depreciation + interest) is usually higher at the beginning and lower at the end of the lease.

In other words, the figures changed without any change in the reality of the business. Therefore, financial managers and banks had to adjust their analyses of debt, profitability, and covenant compliance.

Studies in Latin America have shown that, following the adoption of IFRS 16, average EBITDA increased by approximately 9% and reported debt levels grew by around 10%. The business did not become more profitable or more indebted; these obligations are simply now presented more transparently.

Reconciliation with income tax

At the tax level, the story is different.

In Costa Rica, income tax continues to recognize deductible expenses as rent is paid. The Tax Administration does not recognize lease assets or liabilities as financial accounting does.

This creates temporary differences between accounting profit and taxable profit. For example:

• In IFRS 16 accounting, depreciation of the right of use and financial expense for interest are recorded.

• For income tax purposes, only the rent actually paid is accepted as a deductible expense.

  
  

For this reason, companies must maintain a detailed tax reconciliation, adjusting accounting profit to accurately calculate the taxable base. In some cases, deferred taxes are also generated because expenses are recognized in different accounting and tax periods.

In practice, this means maintaining parallel controls: one for financial reporting under IFRS 16 and another for tax purposes, in order to avoid inconsistencies with the Tax Administration.

Lessons learned

After several years of implementation, IFRS 16 provided several lessons for Costa Rican companies:

• Transparency and comparability: today's financial statements show lease commitments more clearly, which improves the understanding of creditors and partners.

• Need for interpretation: indicators such as EBITDA, debt or ROA must be analyzed carefully, as they are no longer directly comparable with those of previous years.

• Tax management: discipline is required to maintain accurate reconciliations and avoid undocumented discrepancies before the Tax Authority.

What comes with IFRS 18

The International Accounting Standards Board (IASB) approved IFRS 18 – Presentation and Disclosure in Financial Statements, which will come into effect in 2027. This standard will bring significant changes to how companies present their results.

Among the most relevant new features:

• New categories in the income statement: income and expenses will be classified into three groups: operating, investing, and financial.

• Mandatory subtotals: It will be necessary to present operating profit and profit before tax in a standardized way, which will improve comparability between companies.

• Disclosure of internal metrics: the standard will require disclosure of the performance indicators used by management (e.g., EBITDA, gross margin or operating profit), explaining how they are calculated.

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This will present a challenge similar to IFRS 16: systems will need to be adjusted, staff trained, and how results are communicated to investors, banks, and partners will need to be reviewed.

Conclusion

IFRS 16 marked a turning point in Costa Rican accounting.

Although it brought complexities in reconciliations and analysis, it allowed financial statements to more accurately reflect the economic reality of companies.

The arrival of IFRS 18 will require the same level of preparation and professional judgment.