Are Lease Liabilities Debt? | What Lenders Really Watch

In financial reporting, lease liabilities usually count as debt-like obligations because they lock in fixed payments over the lease term.

Lease accounting changed a lot once standards such as IFRS 16 and ASC 842 pushed most leases onto the balance sheet. That shift raised a simple but tricky question for finance teams and owners: are lease liabilities debt or something different?

The label matters because it shapes leverage ratios, bank covenant tests, and how investors read your balance sheet. Treating lease obligations as debt can move net debt, interest coverage, and even valuation multiples. Treating them as something separate can paint a softer picture of risk.

This article walks through how the main standards describe lease liabilities, how banks and analysts treat them in practice, and how you can decide what to do in your own models without upsetting lenders or auditors.

Why The Question About Lease Liabilities And Debt Matters

Lease obligations used to hide in the notes as off-balance sheet commitments for many lessees. Under IFRS 16, most leases now show up as a right-of-use asset and a matching lease liability on the face of the balance sheet, with only limited exemptions for short-term and low-value leases. :contentReference[oaicite:0]{index=0}

Under US GAAP, ASC 842 follows the same basic idea. Lessees bring both finance and operating leases onto the balance sheet, again with limited exceptions. The lessee records a right-of-use asset and a lease liability measured at the present value of lease payments that remain. :contentReference[oaicite:1]{index=1}

Once these liabilities appear next to loans and bonds, users of the accounts start asking whether they belong in “debt” for ratio and covenant purposes. That choice affects:

• Headline leverage, such as net debt to EBITDA.
• Interest coverage and fixed-charge coverage.
• Return measures such as ROCE or ROA.
• Covenant headroom under existing bank facilities.

So the question “Are lease liabilities debt?” is really a question about how much financial risk leases add, and which yardsticks should capture that risk.

How Lease Liabilities Work Under Modern Standards

Before you decide whether to treat lease liabilities as debt, it helps to see how the standards frame them. Both IFRS and US GAAP treat leases as a way to gain control over an asset in exchange for fixed payments over time, rather than only a month-to-month service.

IFRS 16 View Of Lease Liabilities

IFRS 16 requires lessees to recognise a lease liability for almost every lease that runs longer than twelve months and falls outside the low-value exemption. The liability equals the present value of lease payments that remain, discounted at the lessee’s incremental borrowing rate or the rate implicit in the lease. :contentReference[oaicite:2]{index=2}

Many analysts and firms treat that lease liability as part of net debt, since it represents unavoidable payments similar to loan repayments. The IFRS Foundation’s own effects analysis points out that IFRS 16 leads to higher reported liabilities and net debt for lessees because lease obligations that once sat off-balance sheet now sit directly on it. :contentReference[oaicite:3]{index=3}

ASC 842 View Of Lease Liabilities

ASC 842 takes a similar stance on recognition. Lessees record both finance and operating lease liabilities on the balance sheet, again measured as the present value of remaining lease payments. :contentReference[oaicite:4]{index=4}

The standard draws a line between finance lease liabilities and operating lease liabilities when it comes to presentation. Guidance in Deloitte’s DART notes that finance lease liabilities are generally treated as the equivalent of debt in the event of bankruptcy, while operating lease liabilities are characterised as operating obligations rather than debt in the strict accounting sense. :contentReference[oaicite:5]{index=5}

So, under US GAAP you can end up with lease liabilities split across “debt-like” and “operating” categories, even though both sets arise from fixed contractual payments.

Are Lease Liabilities Debt On The Balance Sheet?

Accounting standards give you a starting point, but they do not settle the whole debate. The answer depends on which question you ask and who is asking it.

Accounting Label Versus Economic Substance

From a pure accounting label angle, finance lease liabilities sit close to borrowings. They often sit in the same section as bank loans or bonds, and interest expense from finance leases sits with other finance costs. Operating lease liabilities may sit in a separate line, sometimes under “other liabilities”.

From an economic angle, both finance and operating lease liabilities commit the lessee to pay fixed amounts over a period in exchange for access to an asset. That pattern looks a lot like amortising debt, which is why many investors treat lease obligations as debt-like regardless of the line item heading.

Short Answer Versus Contextual Answer

If you only care about economic risk, many analysts would say “yes, lease liabilities are debt” because they share core features with loans: they are contractual, hard to avoid, and backed by assets and cash flows. Specialist commentary on IFRS 16 and leverage often recommends including lease obligations in debt when comparing companies with different leasing habits. :contentReference[oaicite:6]{index=6}

For strict accounting classification, the answer is more nuanced. Finance lease liabilities normally sit within debt, while operating lease liabilities may sit in their own bucket even though users still adjust them when they assess leverage.

Comparison Of Lease Liabilities And Traditional Debt

The table below sets out how lease liabilities line up against traditional loans and bonds across a few key aspects that matter to preparers, lenders, and analysts.

Aspect	Lease Liabilities	Traditional Borrowings
Source Of Obligation	Right to use a specific asset under a lease contract.	Borrowing of cash from a lender or issuance of bonds.
Balance Sheet Recognition	Recognised under IFRS 16 and ASC 842 for most leases.	Recognised when cash is drawn or bonds are issued.
Linked Asset	Right-of-use asset tied to the leased item.	Cash received, which may fund many assets or expenses.
Payment Pattern	Fixed or indexed lease payments over a set term.	Principal and interest payments based on loan terms.
Security	Often secured by the leased asset and sometimes other collateral.	May be secured or unsecured; terms vary widely.
Accounting Classification	Finance or operating lease liabilities, depending on criteria.	Short-term or long-term debt on the balance sheet.
Common Analytical Treatment	Often added to net debt by investors and rating agencies.	Forms the core of net debt and gearing calculations.
Effect On Ratios After IFRS 16 / ASC 842	Raises leverage and lowers asset-light appearance for lessees. :contentReference[oaicite:7]{index=7}	Leverage rises only when new borrowings are taken on.

How Analysts And Rating Agencies Treat Lease Liabilities

Credit analysts have adjusted for leases for years, even before IFRS 16 and ASC 842 brought them on-balance sheet. Rating methodologies often add lease obligations to debt when they assess leverage, because rating agencies see lease payments as claims on cash in the same way as loan instalments.

Moody’s and other agencies describe operating lease commitments as debt-like and adjust reported figures by capitalising lease payments or using sector multiples. Their aim is to capture the full weight of long-term contractual obligations, even when standards once left them in footnotes. :contentReference[oaicite:8]{index=8}

Independent analysis pieces on IFRS 16 often recommend a consistent treatment that adds lease liabilities to net debt for financial analysis, regardless of whether the reporting framework is IFRS or US GAAP. :contentReference[oaicite:9]{index=9}

In short, many market participants already treat lease liabilities as debt for leverage and valuation work, even when the balance sheet layout under ASC 842 labels some of them as operating liabilities rather than borrowings.

Are Lease Liabilities Debt For Covenants And Lenders?

Bank covenants are a separate world. The wording in your loan agreements controls how lease liabilities feed into tests such as total debt to EBITDA or interest coverage. Some older covenants were drafted before ASC 842, and they may rely on old definitions of “debt” and “lease obligations”.

Guides on ASC 842 and loan covenants stress how lease liabilities can push leverage higher and reduce covenant headroom when definitions are broad. Banks and borrowers often negotiate whether new lease liabilities should sit inside “funded debt” or stay outside, especially where ASC 842 adoption changes reported numbers without any new cash borrowing. :contentReference[oaicite:10]{index=10}

Newer facilities tend to define “debt” in ways that either include or explicitly exclude operating lease liabilities. Some covenants refer to “finance lease obligations” only. Others cap the portion of lease obligations that count toward leverage tests.

Are Lease Liabilities Debt For Your Business Covenants?

To answer that question for your own business, you need to read the exact wording of each loan agreement and private placement. A typical checklist looks like this:

• Does the definition of “Indebtedness” mention leases or lease obligations?
• Does it distinguish between finance leases and operating leases?
• Do leverage and coverage ratios use that same definition without adjustments?
• Have side letters or amendments modified the treatment of lease liabilities after ASC 842 or IFRS 16 adoption?

Only once you walk through those points can you say with confidence how your own lenders treat lease liabilities in covenant calculations.

Context Checklist: When Are Lease Liabilities Debt?

The practical answer to “Are lease liabilities debt?” depends heavily on context. The table below summarises typical approaches across a few common settings.

Context	Typical Treatment Of Lease Liabilities	What To Confirm
IFRS Financial Reporting	Lease liabilities recognised; many users add them to net debt. :contentReference[oaicite:11]{index=11}	How management defines net debt and gearing in reports.
US GAAP (ASC 842)	Finance lease liabilities seen as debt; operating lease liabilities as operating obligations. :contentReference[oaicite:12]{index=12}	Where each lease category sits on the balance sheet and in note disclosures.
Bank Covenants	Depends on legal definitions; may include or exclude operating leases. :contentReference[oaicite:13]{index=13}	Exact wording of “Indebtedness” and any carve-outs or caps for lease obligations.
Credit Rating Analysis	Lease obligations commonly added to debt using capitalisation methods. :contentReference[oaicite:14]{index=14}	Which method each agency uses and how it affects leverage ratios.
Internal Management Metrics	Varies; many groups track both “gross debt” and “debt including leases”.	Consistency of treatment across periods and segments.
Acquisition Modelling	Buyers often add lease liabilities to enterprise value bridge and net debt. :contentReference[oaicite:15]{index=15}	Alignment between SPA definitions, valuation models, and lender metrics.
Small Business Planning	Lease payments sometimes treated like loan repayments in cash flow forecasts.	Whether banks and investors reading those plans take the same view.

Are Lease Liabilities Debt For Smaller Firms And Private Owners?

Public groups can lean on formal investor relations policies and rating reports when they set their stance on lease liabilities. Smaller firms often rely on a combination of local GAAP, their auditor’s view, and bank expectations.

In that setting, the best path is usually to stay clear and consistent. If your bank wants operating lease liabilities inside total debt for covenant purposes, then treat them the same way in board papers and management dashboards. If the bank excludes them, still show a supplementary view that adds them back so decision-makers see the full picture of fixed payment commitments.

This approach gives lenders, owners, and staff a shared picture of risk, even when legal definitions vary between documents.

Practical Steps For Handling Lease Liabilities In Debt Metrics

Once you understand the technical background, you still need a working plan. Here is a simple sequence many finance teams follow when they decide how to treat lease liabilities in practice:

Step 1: Map Your Lease Portfolio

Start with a clean list of your leases by type, term, and accounting classification. IFRS 16 and ASC 842 both require detailed disclosures of lease liabilities by maturity band, discount rate, and type, so the data should already exist in your ledger or lease system. :contentReference[oaicite:16]{index=16}

Group the leases into finance leases, operating leases, and any short-term or low-value leases that remain off-balance sheet. That breakdown gives you a base for both accounting and analytical decisions.

Step 2: Align With Reporting Frameworks

Next, decide how your published metrics will line up with accounting standards. Many IFRS reporters now define net debt to include all lease liabilities, while some US GAAP reporters draw a line between finance lease liabilities and operating lease liabilities when they present “debt” in their non-GAAP measures. :contentReference[oaicite:17]{index=17}

Whatever choice you make, apply it consistently across periods and disclose the treatment clearly in management commentary, so external users do not have to guess.

Step 3: Reconcile To Bank And Bond Covenants

Then line up your internal metrics with covenant definitions. If your banks include operating lease liabilities in debt, adjust your net debt and leverage dashboards to match. If they exclude them, build a bridge between “covenant debt” and “economic debt including leases” so you can manage both headroom and real risk at the same time.

Keep a simple covenant pack that shows:

• Total debt as defined in agreements.
• Lease liabilities split by finance and operating categories.
• Leverage with and without lease liabilities.
• Headroom to each covenant limit under both views.

Step 4: Document Your Policy

Finally, record your approach in a short internal policy note. Set out how you define debt, which lease liabilities you include, and how you explain that treatment across board papers, investor decks, and lender updates. This document helps new team members and external advisers keep the same approach, even when standards or business models change.

So, Are Lease Liabilities Debt Or Not?

From an economic standpoint, lease liabilities behave a lot like debt. They draw cash through fixed payments, they often have collateral behind them, and failure to pay usually comes with serious consequences. That is why standards such as IFRS 16 and ASC 842 brought them onto the balance sheet, and why analysts so often add them to net debt. :contentReference[oaicite:18]{index=18}

From a narrow legal or covenant angle, the answer stays tied to definitions. Some agreements treat only finance lease obligations as debt, some include both finance and operating leases, while others exclude lease liabilities entirely from debt tests.

The safest working habit is to think in layers. Use accounting rules to recognise lease liabilities, use your own policy to decide which ones go into “debt” for analytical purposes, and use contract wording to judge how lenders see them. When those three layers line up, the question “Are lease liabilities debt?” stops being a headache and turns into a clear part of your financial story.