How to Compare IFRS and US GAAP: Lease Liabilities in Practice

To compare IFRS and US GAAP financial statements, reconcile lease liabilities before comparing net debt, EBITDA or operating cash flow. The choice matters for retailers with hundreds or thousands of leased premises. H&M Group's FY2025 figures show how a company can report net debt of SEK 57,028 million while also reporting financial net cash of SEK 233 million under a narrower definition. Those are not contradictory disclosures. The difference is predominantly lease liabilities, with a smaller pension component.¹

Target Corporation (NYSE: TGT), reporting under US GAAP, provides the other side of the accounting test. Its FY2025 annual statements recorded USD 3,834 million of operating lease liabilities and USD 2,113 million of finance lease liabilities at 31 January 2026. That is USD 5,947 million in combined lease obligations. Both companies recognize leases on the balance sheet, but the operating-expense and cash-flow presentations differ between IFRS 16 and US GAAP's ASC 842.²³

Why this is not another IFRS-versus-GAAP overview

Our existing US GAAP and IFRS financial-statement guide explains the broad framework differences using Cisco and Nokia. Here we perform one specific reconciliation: how much the lease obligations and accounting definitions change the interpretation of debt and operating cash generation for two retailers. It is a more useful question for an analyst than asking whether the statements have the same line names. The aim is not to rank H&M and Target as investments; their reporting currencies and fiscal year-ends are different.

H&M's latest annual report available for this lease-note study covers the fiscal year ended 30 November 2025. Target's FY2025 report ended 31 January 2026. More recent interim releases are available: H&M reported the quarter ended 31 August 2026 and Target reported the quarter ended 1 August 2026. Those releases supply a current check on the companies, but the complete lease reconciliations below are from their annual notes. We do not present annual lease balances as if they were Q3 2026 values.⁴⁵

H&M: net debt changes with the definition

H&M's FY2025 annual report defines net debt to include interest-bearing lease liabilities and pension provisions, while financial net debt excludes those categories. Its leases were SEK 56,872 million and pension provisions SEK 389 million. The difference between total net debt of SEK 57,028 million and financial net cash of SEK 233 million is therefore SEK 57,261 million, exactly the sum of these excluded components. The equation comes directly from the company's key-measure definitions and is reproducible.¹

The bridge is 20,675 + 56,872 + 389 − 20,908 = 57,028, all in SEK millions. Strip out leases and pensions and the same data gives 20,675 − 20,908 = −233, or SEK 233 million of financial net cash. These measures answer different questions. The wider one incorporates contractual lease obligations; the narrower one isolates borrowing outside the lease and pension definitions. An analyst should not label one figure "wrong" because a website displays the other.¹

Target: operating and finance leases coexist

Target uses ASC 842's operating and finance lease categories in its US GAAP financial statements. Its annual note lists current and noncurrent operating lease liabilities of USD 372 million and USD 3,462 million, plus finance lease liabilities of USD 131 million and USD 1,982 million. The operating total is USD 3,834 million; the finance total is USD 2,113 million. At the prior year-end, the corresponding totals were USD 3,935 million and USD 2,161 million.²

The three-part calculation is 372 + 3,462 = 3,834 for operating leases; 131 + 1,982 = 2,113 for finance leases; and 3,834 + 2,113 = 5,947 overall. The total does not belong in a claim that the company has USD 5.947 billion in conventional bank debt. It is a lease obligation, with a distinct maturity schedule and different income-statement presentation. That distinction is relevant in liquidity work and in enterprise-value calculations.²

Why EBITDA and operating cash flow can diverge

Under IFRS 16, lessees generally recognize a right-of-use asset and a lease liability, with depreciation and interest rather than a traditional operating lease rental expense for most eligible leases. Under ASC 842, Target's operating leases typically produce a single lease cost in operating expenses, while its finance leases are split into amortization and interest. The income-statement classifications therefore affect EBIT and EBITDA comparisons even when both companies recognize lease obligations.³²

H&M's FY2025 lease note reports SEK 14,842 million in principal repayments of lease liabilities and SEK 1,982 million in lease-liability interest expense. Target's FY2025 note reports USD 529 million of operating cash flows from operating leases, USD 79 million of operating cash flows from finance leases and USD 142 million of financing cash flows from finance leases. These categories cannot be added across companies to produce a like-for-like cash conversion ratio. First identify which lease cash payments sit in operating versus financing cash flow for each issuer.¹²

Our rule is to calculate both unadjusted reported cash flow and a clearly defined lease-adjusted cash-flow measure if the question warrants one. Keep the reconciliation: statutory operating cash flow, lease principal included outside it, lease interest policy, capex and resulting analytical free cash flow. A figure called "free cash flow" without that policy description can be less comparable than the original IAS 7 or ASC 842 cash-flow statement.⁶

Do not mistake the latest quarterly results for the lease footnote

The August 2026 comparison underscores why "latest" needs a qualifier. H&M reported SEK 6,037 million of operating profit in its quarter ending 31 August 2026, including a tariff and import timing benefit that it estimated at about 1.6 percentage points of operating margin. Target reported USD 2,560 million of operating income in its quarter ending 1 August 2026, including USD 994 million of tariff refund benefits. Those are current income-statement events, not replacements for the separate annual lease disclosures.⁴⁵

It would be misleading to call these firms' 2026 quarters identical merely because both are labelled Q2 or Q3 by their respective issuers. The month-end dates differ and the financial reporting frameworks are different. Annual debt bridges should not borrow quarterly revenue denominators without an explicit trailing-period construction. Source-linked financial analysis starts with this calendar discipline before it advances to valuation or trend interpretation.

What changes when IFRS 18 takes effect

IFRS 18 becomes effective for annual periods starting on or after 1 January 2027, unless adopted early. It introduces defined operating-profit subtotals and management-defined performance-measure disclosure requirements. Related changes to IAS 7 also affect the starting point for indirect-method operating cash flow and classification of interest and dividends. That may improve consistency for IFRS reporters, but it will not erase lease classification differences with US GAAP.⁷⁶

A reproducible comparison in Clarifo

We use our Data API or Claude and ChatGPT MCP connection to bring financial statements and their sources into one research workflow. For H&M, retrieve both definitions of net debt and keep the note explaining the inclusion of lease liabilities. For Target, retrieve the operating and finance lease notes alongside the balance sheet. Rebuild the bridge independently and check the latest interim reports for material changes, rather than combining accounting amounts just because their labels resemble each other.⁸

The alternative view is that including all lease obligations in net debt overstates financial risk for a retailer with flexible store renewal options and recurring lease-driven sales. The competing view is that excluding leases understates contractual obligations. Both contain useful information; the answer depends on lease terms, renewal behavior, store economics, maturity schedules and interest coverage. H&M's lower FY2025 lease balance and Target's modest reduction in lease obligations do not settle that debate without operational and valuation context.

Sources and methods

Checked 4 November 2026: H&M Group FY2025 annual report, lease note and net debt definitions; H&M 2026 nine-month release; Target FY2025 10-K financial statements and leases note; Target Form 10-Q ended 1 August 2026; IFRS 16 standard; IFRS 18 standard. All bridge amounts are issuer-reported or direct sum/subtraction of issuer figures; no FX conversion and no cross-company EBITDA ranking are implied.