Let's do an example of leases in multiples valuations Here, we've got two companies and IFRS company and a US Gap company.

They're both going to lease a bus.

On their balance sheets. We'll see exactly the same things. We'll see an asset and we'll see a liability representing the money they owe on the lease.

But on the income statements we're going to see some differences.

For the IFRS company, we'll see two expenses. We'll see depreciation of six and interest of three we've just made those numbers up.

Whereas for the US Gap company, we're going to see one expense and that'll be an operating lease rental expense of nine.

So while the balance sheets are similar there is difficulty in comparing US versus IFRS income statements.

So, let's see them in a bit more detail.

We'll start with the US Gap company and here we've got sales cogs and sg&a. They're in the usual places.

Interesting to realize here is we've then got the operating lease rental expense just above ebitdar.

So that expense is being deducted and is being included in that ebitdar calculation.

To get then from ebitdata ebit we take off d and a those figures here are zeros.

And then to get from ebit to profit before tax, we take off interest. And again, that figures is zero here.

Now, let's do it for our IFRS company and identical company.

It's got sales cogs and sg&a, but you might notice now that we don't have an operating lease rental expense under IFRS. It doesn't exist. We've just left a great big gap there.

Just to show you where it would be here. We've written it in. It's an italics and it's in a light gray, but it says na not applicable.

You might notice we've now got a different e-bit dab eBay 109 versus the US Gap companies 100.

So, where's the operating lease rental expense of nine gone? Surely it has to go through the IFRS income statement somewhere.

Well, it will be it'll be split into two parts.

First part is depreciation. We'll have depreciation of six whereas for the US Gap company. We don't have any depreciation.

And the second place it'll go through is through interest interest of three.

So the operating lease rental expense of nine. You may ask yourself. Well, if that's in a US Gap company, where do I see it in the IFRS company? It still is there it's the six and the three of depreciation and interests.

So overall the income statements are the same but it's going to lead to some differences in the analysis that we do particularly. Our e-bit.

Dar figures are going to be different and our e-bit figures. We've got an IFRS ebit of 103.

We've got us Gap eBay of 100.

This is now where it gets a bit more interesting.

You might have been thinking this is all really interesting. But it's just accounting. Why do I need to know this? Well, the interesting bit here is that we can't compare these two companies. This is how it affects us. And this is how it affects our jobs.

So to sum it up.

EBay dolls and ebits on US versus IFRS income statements can't be compared least expenses are treated differently.

So, how can we fix this? Let's try and fix the ebitdar first.

The difference between the two e-bit does here is the nine it's that operating least rental expense. So what we can do is we can calculate a new figure called ebit.r or earnings before interest tax depreciation amphetization and rent.

that new figure of e-bit dark are can now be compared to the IFRS ebitdar R, which is awesome the same as the IFRS Ebert are So to sum that up to make the US and IFRS, eBay's comparable add back the operating lease rental expense of nine to the US ebitdar to calculate ebit.r this can now be compared to the IFRS ebitdon.

Fantastic, let's put a box around that so we know those numbers are good and they are comparable.

But what about ebit? Ebit, it's a little bit trickier. We've got the ebit of 103 versus e bit of 100.

Only different between them is the interest of three that we can see on the IFRS companies income statement.

So what we can do to the US Gap company's ebits is we can add back that three and implied interest of three is calculated as one third of the rent expense that rent expense was the 9.

So to make the US and IFRS e-bit figures comparable add-back implied interest to the use ebit.

We've now got comparable e-bit Dart our figures we've got comparable evit figures we could put them into multiples maybe for trading comps or common stock comparison sets and our companies would now be comparable.