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Balance sheet
The honest answer is not yes or no. It is that the treatment changes with the ratio you are computing, and one of the four common uses breaks entirely if you count leases without adjusting the denominator too.
9 min read· Corva Research
The short version
A lease liability is the present value of the payments a company has committed to make for the use of an asset it does not own. Since 2019 it sits on the balance sheet whether the lease is called operating or finance, and the question of whether to treat it as debt is now a question about your own analysis rather than about the accounting.
Almost everything written on this is aimed at somebody else: lease administrators, covenant memos for CFOs, audit checklists, valuation notes for appraisers. None of it tells a shareholder what to do with the line when computing net debt on a Sunday afternoon. So this post gives one rule per use case, works it through a real filing, and names the case where counting the liability as debt makes your number worse.
Under ASC 842, a US lessee recognises a right-of-use asset and a lease liability for any lease longer than twelve months. The liability is the discounted value of the remaining payments. The asset is the right to use the property over that term.
It behaves like debt in the ways that matter. The payments are fixed, contractual, senior to the shareholder, and enforceable in a bankruptcy. That is why Aswath Damodaran argued, long before the standard changed, that "the present value of commitments to make such payments in the future has to be treated as debt."
It differs from debt in one way that matters. A borrowing gives you cash to spend on anything. A lease gives you a specific building for a specific period, and the balance sheet carries the matching asset, so the liability arrives with something on the other side. That asymmetry is why there is no single correct treatment. There is a correct treatment per question.
Four things a shareholder computes touch this line. The answer differs for each.
The third case is the one that catches people, because the mistake is invisible. You add a large liability to enterprise value, the multiple rises, and the number looks conservative. It is not conservative. It is wrong in one direction.
Darden operates Olive Garden, LongHorn Steakhouse, Cheddar's, Ruth's Chris and Chuy's, and leases most of the property it trades from. Its Form 10-K for the year ended 31 May 2026 reports total lease liabilities of $5,679.2m against borrowings of $2,383.1m. The leases are more than twice the debt.
The lease note gives everything needed. Operating lease liabilities are $216.5m current plus $3,722.3m non-current, so $3,938.8m in total, and finance lease liabilities are $1,740.4m. Total undiscounted operating lease payments are $5,672.1m, less $1,733.3m of imputed interest. The weighted average remaining operating lease term is 14.5 years and the weighted average discount rate is 4.7%.
Cash is $219.5m. Operating income is $1,582.8m and depreciation and amortisation is $561.1m, so EBITDA is $2,143.9m. Operating lease expense, a single straight-line charge sitting inside operating costs, is $445.8m. Here is the same company at five treatments of the same line.
| Treatment | Net debt | EBITDA | Ratio |
|---|---|---|---|
| Leases excluded | 2,163.6 | 2,143.9 | 1.0x |
| Finance leases only | 3,904.0 | 2,143.9 | 1.8x |
| All leases, EBITDA unchanged | 7,842.8 | 2,143.9 | 3.7x |
| All leases, EBITDAR | 7,842.8 | 2,589.7 | 3.0x |
| Darden's own covenant test | 5,651.2 | 2,768.5 | 2.0x |
$ millions, fiscal year ended 31 May 2026. Net debt is short-term debt of $694.0m plus long-term debt of $1,689.1m, both before discount and issuance costs, less cash of $219.5m, plus the lease liabilities indicated. EBITDAR adds back the $445.8m operating lease expense. The last row is the company's own adjusted debt to adjusted EBITDAR covenant calculation. Source: Darden Restaurants Form 10-K, FY2026, Notes 7 and 11 and Item 7, filed 24 July 2026. Ratios computed from the figures shown.
Read the third and fourth rows together, because they are the whole point. Both add the full $5,679.2m of lease liabilities to net debt. One leaves EBITDA where it was and reports 3.7x. The other adds back the operating lease expense the leases generate and reports 3.0x. The difference is 0.7 turns of leverage on a company where nothing changed except arithmetic discipline.
The bottom row is worth a second look for a different reason. Darden's lenders do not use the balance sheet figure at all. The credit agreement values the leases at six times annual minimum rent of $530.8m, which is $3,184.8m, against a reported operating lease liability of $3,938.8m. The bank and the accountant disagree by $754.0m on the same leases in the same filing.
If two professional parties can differ that much, it is fair to ask what the reported number actually depends on.
It depends, more than most readers realise, on a rate the company chooses.
ASC 842 tells a lessee to use the interest rate implicit in the lease when that rate is readily determinable, and otherwise its incremental borrowing rate: what it would pay to borrow the same amount, on a collateralised basis, over a similar term. The implicit rate almost never clears the "readily determinable" bar, because it needs the lessor's residual value assumptions. So the number on nearly every US balance sheet is an estimate the company made about itself, and the risk-free election that would remove the judgement is open only to private companies.
Darden says so directly in the footnote:
"We cannot determine the interest rate implicit in our leases. Therefore, the weighted average discount rate represents our incremental borrowing rate and is determined based on the risk-free rate, adjusted for the risk premium attributed to our corporate credit rating for a secured or collateralized instrument."
A higher rate discounts the same payments to a smaller liability. Take Darden's own maturity schedule, spread the $3,523.3m "thereafter" column over a tail long enough to reproduce the filed $3,938.8m at 4.7%, then re-discount it. At 6.3%, the coupon on Darden's senior notes due 2033, the same payments present at roughly $3.53B. About $400m of balance sheet liability turns on 160 basis points of assumption.
This is not an accusation. Darden's disclosed 4.7% sits close to the roughly 4.9% weighted average coupon on its outstanding senior notes, and its leases are collateralised where the notes are unsecured, which is the direction the footnote describes. The assumption survives the check. That is the point of running it.
The check takes two minutes, and ASC 842-20-50-4 makes it possible by requiring both the weighted average discount rate and the weighted average remaining term to be disclosed:
Note which way the incentive runs. Management picks the rate, and a higher rate makes the balance sheet look better. One more thing sits between you and a clean comparison, though, and it is not the rate. It is the jurisdiction.
The two standards agree that the liability belongs on the balance sheet. They disagree about where the cost goes on the income statement, and the disagreement lands exactly on EBITDA.
IFRS 16 uses a single lessee model. Every lease longer than twelve months, short of a low-value exemption, produces depreciation of the right-of-use asset and interest on the lease liability. Both sit below EBITDA. ASC 842 keeps two classes, and for an operating lease it charges a single straight-line lease cost inside operating expenses, above EBITDA.
Same lease, same cash, different EBITDA. Darden shows the size of the gap on its own numbers. Reported EBITDA is $2,143.9m. Move the $445.8m operating lease expense below the line, as IFRS 16 would, and EBITDA becomes $2,589.7m.
| Line | ASC 842 | IFRS 16 basis |
|---|---|---|
| Operating income | 1,582.8 | 2,028.6 |
| Depreciation and amortisation | 561.1 | 561.1 |
| EBITDA | 2,143.9 | 2,589.7 |
$ millions, fiscal year ended 31 May 2026. The IFRS 16 column moves the $445.8m straight-line operating lease expense below operating income, where the standard would split it into depreciation and interest. Variable lease expense of $39.8m stays above the line under both standards and is unchanged. Source: Darden Restaurants Form 10-K, FY2026, consolidated statements of earnings and Note 11. Computed from the figures shown.
Now put that against an enterprise value that is identical under both standards, because the lease liability is on the balance sheet either way. The IFRS reporter divides by a bigger denominator. On identical economics, an IFRS 16 filer screens roughly 17% cheaper on EV/EBITDA than a US filer with the same leases.
For a reader holding a Singapore or Hong Kong listed restaurant or retailer alongside a US comparable, that is not a rounding error. It is most of the discount you thought you had found. Add the operating lease expense back to the US company's EBITDA, or strip lease depreciation and interest out of the IFRS company's, before either multiple means anything.
All of which assumes the lease is genuinely a fixed obligation. Sometimes it is not.
Take a warehouse operator on a nine-month lease over standard racked space in a market with vacancy. It can hand the space back and take equivalent space down the road. There is no obligation stretching into the future and nothing a creditor could enforce beyond the notice period. That is an operating cost with a supplier, and calling it debt overstates leverage on a business that has none. ASC 842 half concedes the point: leases of twelve months or less stay off the balance sheet entirely.
The harder version of the problem is that the capitalised number itself contains optionality the standard treats as certainty. Darden's footnote is unusually candid about it. Of the $5,672.1m of total future operating lease commitments, only $2,041.5m is non-cancellable. The other $3,630.6m, 64% of the committed total, sits in periods the company recognised because renewal was judged reasonably certain rather than because it is contractually trapped.
Two conditions decide it, and both have to hold:
Fail either test and treat the lease as an operating cost. Pass both and it is debt, whatever the caption says. The rule is not "always count it".
The four rules give you a defensible treatment. They do not give you a right answer, and the gaps are worth naming.
Often not. Multiples of annual rent remain common in covenant definitions because they predate ASC 842 and lenders did not all rewrite their documents when the standard changed. Darden's credit agreement uses six times minimum rent, which produces $3,184.8m against a reported operating lease liability of $3,938.8m.
Yes, provided you also add the operating lease expense back to EBITDA. Adding it to the numerator alone charges the buyer for the liability and then charges the earnings for the rent as well. On Darden that error moves net debt to EBITDA from 3.0x to 3.7x.
Because ASC 842 kept the two-class model for the income statement even after putting both on the balance sheet. A finance lease splits into amortisation and interest, both below EBITDA. An operating lease is a single straight-line cost above it. Darden's FY2026 finance lease charge was $64.7m of amortisation plus $78.2m of interest, while the operating lease charge was $445.8m in one line.
Not in a leverage calculation, and rarely in size. The asset is not cash and cannot service the payments. It belongs in the capital base for a return on capital calculation and nowhere in net debt. At Darden the two differ by $850.2m in any case.
It has less flexibility in a downturn than an owner with an unmortgaged freehold, and more than one carrying a mortgage of the same size, because a lease can sometimes be assigned or renegotiated where a bond cannot. Ranking the two takes the exit terms in the lease note, not the headline number.
The lease note, usually titled Leases, carries the liability split, the maturity schedule, the weighted average term and the weighted average discount rate. The debt note carries the coupons you check the rate against. Both are in the notes to the financial statements. Our guide to reading a 10-K in 30 minutes covers the order to take them in, and the same discipline of reconciling a ratio to the note behind it drives the test in gross margin decline.
Corva reads the lease note, pulls the liability, the weighted average discount rate and the maturity schedule, and reports leverage with and without leases so you can see which treatment is carrying your conclusion. Figures are computed from the filed statements and cross-checked against SEC EDGAR. Where a number cannot be found, it says so rather than inventing one.
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Corva is a research tool, not a broker or investment adviser, and nothing here is a recommendation to buy, sell or hold any security. Darden Restaurants is used here because it discloses a material lease portfolio in full, and for no other reason. All figures are taken from the company's Form 10-K for the fiscal year ended 31 May 2026, filed 24 July 2026; ratios and the discount rate sensitivity are computed from those figures and the sensitivity carries a stated assumption about the timing of payments in the "thereafter" column. Verify anything you intend to act on against the primary filing. See terms and disclaimer.