Anonymised, illustrative composite. A retail chain's own books, prepared correctly under Canadian private-enterprise accounting rules, showed one EBITDA. The identical leases, restated under the standard the buyer's public comparables actually report under, showed a different one — and the gap was not an error on either side.
At a glance
The target operated five leased retail and warehouse locations and, as a private Canadian company with no public reporting obligation, prepared its financial statements under ASPE — Accounting Standards for Private Enterprises, Part II of the CPA Canada Handbook, Section 3065. Its five leases were treated as operating leases: no asset or liability on the balance sheet, and the full annual rent, $1,100,000 across all five locations, recognised as a straight-line expense inside EBITDA.
The buyer was a larger group whose own consolidated statements are prepared under IFRS, and whose acquisition multiple was benchmarked against public comparables that also report under IFRS. That is where the mismatch started: the comparable multiple had been calibrated on companies whose EBITDA, by construction of the standard they report under, excludes lease expense almost entirely.
IFRS 16 does not use the operating-lease-versus-capital-lease distinction ASPE retains. As the IFRS Foundation's own standard summary states, “IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value,” and “a lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.” Restated on that basis, the five leases would no longer produce a rent expense inside operating costs; they would instead produce depreciation and interest, both of which sit below EBITDA.
The seller's banker wanted the benefit of that restatement — a materially higher EBITDA, multiplied at a rate calibrated on IFRS reporters — without restating the balance sheet to carry the lease liability the same restatement creates. That prices the upside of the accounting change and ignores the liability it puts on the balance sheet.
Under ASPE, the five leases contributed $1,100,000 of straight-line rent expense inside operating costs, directly reducing EBITDA. Restated under IFRS 16, the same leases produce approximately $850,000 of right-of-use depreciation and $310,000 of interest in the first year — neither an operating expense — so EBITDA on this basis comes out approximately $1,100,000 higher for the identical leases and identical cash paid.
At the deal's proposed 7.0x multiple, that difference is worth $7,700,000 of enterprise value. The IFRS 16 restatement also creates a lease liability, present-valued at the remaining payments across all five locations — roughly $6,200,000, using a weighted-average remaining term of about six years and a 7% incremental borrowing rate. Recognised as a debt-like item in the equity bridge, that liability offset most, though not all, of the EBITDA-driven increase.
Neither ASPE nor IFRS 16 is a statute; both are professional accounting standards — ASPE Section 3065 in Part II of the CPA Canada Handbook for private enterprises, and IFRS 16, issued by the International Accounting Standards Board and, per the IFRS Foundation, “effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted.” Which one a company reports under is a matter of accounting policy choice, not law, and a private Canadian target has no obligation to report under IFRS unless it chooses to or is required to by a lender or a parent. The Canada Business Corporations Act was checked for a mandated framework: s.155(1) requires a corporation's annual financial statements to conform to “prescribed requirements,” which in the regulations means generally accepted accounting principles — a category ASPE and IFRS both satisfy. It compels the target to use SOME acceptable GAAP; it does not pick between them, and it says nothing about which framework a buyer's multiple should be applied to.
The rule that actually decided the price was a valuation discipline, not an accounting one: a multiple calibrated on companies reporting under one framework must be applied to an EBITDA prepared consistently with that same framework, and if the EBITDA is restated to get there, the balance-sheet consequence of that restatement — here, a new lease liability — has to be restated with it. Taking the EBITDA benefit of a framework change while keeping the ASPE balance sheet is not a technical error either side could point to in a standard; it is simply pricing the same fact twice in the buyer's favour, or once in the seller's, depending on who proposes it.
The parties priced the deal on the IFRS 16-restated EBITDA, consistent with the multiple both sides had anchored to from public comparables, and recognised the $6,200,000 lease liability as a debt-like item in the same closing adjustment — a net price increase of roughly $1,500,000 over a pure ASPE-basis valuation, with the EBITDA gain and the new liability both counted rather than only the gain.
The purchase agreement's EBITDA and Indebtedness definitions were drafted with an explicit, cross-referenced lease-accounting basis, so a future dispute could not select the IFRS 16 EBITDA and the ASPE balance sheet, or the reverse, depending on which combination produced a better number.
Applying the IFRS-calibrated 7.0x multiple to the restated EBITDA while leaving the lease liability off the balance sheet, as first proposed, would have added the full $7,700,000 EBITDA-driven premium with no offsetting recognition of the $6,200,000 in lease obligations the buyer was actually assuming — a mismatch in the seller's favour, for an accounting presentation choice rather than any change in the underlying leases or cash flows.
The tell was that the seller's model changed the accounting framework only where it helped: the EBITDA build used IFRS 16 assumptions to get a higher number, while the debt schedule stayed on the ASPE, no-lease-liability basis. A framework applied selectively, one line at a time, is the sign to check whether both sides of the restatement were carried through.
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