Why Is There a 'Pre Ind AS 116' EBITDA Number?
If you have ever read a company's earnings release and spotted two EBITDA figures — one labelled reported and one labelled pre Ind AS 116 — you are not alone in wondering what is going on. This single accounting standard has changed how balance sheets, income statements, and even popular valuation metrics look. As a CA student, understanding this adjustment is no longer optional; it is expected in financial analysis papers and in practice.
---
A Quick Recap: What Ind AS 116 Actually Does
Before Ind AS 116 came into effect, most operating leases were kept off the balance sheet. A company paying rent simply booked the payment as an operating expense — clean and simple. Lease obligations did not appear as liabilities, and no corresponding 'right-of-use' (ROU) asset sat on the asset side either.
Ind AS 116 changed that logic fundamentally:
- The lessee recognises a Right-of-Use (ROU) asset on the asset side.
- A matching lease liability appears on the liability side.
- Instead of a single rent expense hitting operating profit, the cost now splits into:
- Depreciation on the ROU asset (still above EBIT but below EBITDA)
- Finance cost / interest on the lease liability (below EBIT entirely)
The practical effect? EBITDA goes up because the old rent expense (which reduced EBITDA directly) is now replaced by depreciation and interest, neither of which reduces EBITDA.
---
Why Companies Report Both Numbers
Imagine a restaurant chain that operates hundreds of outlets — every single one on a long-term lease. When Ind AS 116 arrived, the reported EBITDA of such a business jumped dramatically, not because operations improved, but purely because of accounting reclassification.
That creates a comparability problem:
- Year-on-year comparisons become misleading if one period is pre-standard and another is post-standard.
- Peer comparisons get distorted when some companies have heavy lease portfolios and others own their premises.
- Valuation multiples like EV/EBITDA can look artificially lower after Ind AS 116, making a business appear cheaper than it really is.
To solve this, management voluntarily discloses EBITDA pre Ind AS 116 — essentially restating the figure as if operating leases were still expensed the old way. This lets analysts compare apples with apples.
---
The RBA Example: How to Read a 265% Jump
A recent market update showed Restaurant Brands Asia (RBA — the operator of Burger King India and Popeyes) reporting a massive year-on-year percentage jump in EBITDA pre Ind AS 116 for Q1 FY27. A number like 265.7% growth sounds extraordinary, but before you get excited or alarmed, run through this mental checklist:
Step 1 — Understand the Base Effect
A very low or near-zero base in the prior comparable quarter makes percentage growth figures look dramatic. If EBITDA pre Ind AS 116 was, say, ₹5 crore last year and is ₹18 crore now, the percentage is huge, but the absolute improvement is modest in the context of a large-format restaurant business. Always look at absolute numbers alongside percentages.
Step 2 — Separate Accounting Noise from Operating Reality
The pre Ind AS 116 EBITDA strips out the accounting uplift from the standard. A big jump here signals genuine operational improvement — better store-level margins, higher average spends, or cost efficiencies. That is the number analysts use to judge management's execution.
Step 3 — Check What Is Included in 'Lease'
Not every 'rent-like' payment qualifies under Ind AS 116. Short-term leases (generally under 12 months) and low-value asset leases can be exempted and still expensed directly. So two companies in the same sector may apply practical expedients differently — always read the accounting policy note in the financial statements.
Step 4 — Reconcile to Reported EBITDA
The difference between reported EBITDA and pre Ind AS 116 EBITDA is essentially the lease cost brought back in. This difference tells you the company's annual lease burden — a critical input for assessing financial risk, especially in capital-light, lease-heavy sectors like quick-service restaurants, retail, and airlines.
---
What This Means for Financial Analysis
As a CA student — especially at the Intermediate or Final level — you need to build three habits around Ind AS 116:
- Always identify the lease model: Is the company asset-heavy (owns property) or lease-heavy? The accounting impact is far larger for lease-heavy businesses.
- Use the right EBITDA for the right purpose: For internal operating efficiency analysis, pre Ind AS 116 EBITDA is cleaner. For lender covenants and credit analysis, the reported (post Ind AS 116) numbers matter because the lease liability is a real obligation.
- Read the notes: The standard requires companies to disclose maturity profiles of lease liabilities, undiscounted cash flows, and interest rates used. These notes are goldmines for any financial analysis question in your exam.
> Note: Always verify exact section references, threshold amounts, and exemption criteria in the latest ICAI study material / announcement, as standards and their interpretations are periodically updated.
---
A Simple Logic Walk-Through
| Item | Pre Ind AS 116 Treatment | Post Ind AS 116 Treatment | |---|---|---| | Rent expense | Deducted above EBITDA | Replaced by depreciation + interest | | EBITDA impact | Lower (rent reduces it) | Higher (rent no longer deducted here) | | Net profit impact | Depends on lease term | Front-loaded cost due to higher interest early in lease | | Balance sheet | No lease asset or liability | ROU asset + lease liability appear |
This table alone can help you answer a 5-mark theory question or a case-study scenario in your exam.
---
FAQs
Q1. Is EBITDA pre Ind AS 116 a GAAP measure? No. It is a non-GAAP or supplementary measure that companies voluntarily disclose for better comparability. ICAI and SEBI require the reported (Ind AS 116 compliant) figures in audited statements, but management commentary may include the adjusted figure.
Q2. Does Ind AS 116 affect cash flows? Operating cash flows typically improve because lease repayments are now classified as financing outflows (repayment of lease liability principal) rather than operating outflows (rent). Always compare cash from operations carefully when lease portfolios are large.
Q3. For CA exam purposes, should I memorise the percentage growth of specific companies? No — exam questions test your understanding of how the adjustment works and why it matters, not real company percentages. Focus on the accounting logic, journal entries, and analytical interpretation.
---
Mastering Ind AS 116 is as much about analytical thinking as it is about debits and credits. The best way to build that thinking is through structured practice. Map out your Ind AS revision day by day using the free study planner at caparveensharma.com/free-planner?src=article, and sharpen your case-scenario skills through the free practice resources available in the courses section at caparveensharma.com. CA Parveen Sharma's 36 years in the classroom mean every concept is broken down the way a student's mind actually works — give it a try.