By learning from these common 12 IFRS 16 errors (and applying the right fixes) your finance team can improve accuracy, reduce risk, and free up time through lease accounting automation.
IFRS 16 lease accounting is challenging, and CFOs often face similar pitfalls along the way. If not addressed, these IFRS 16 errors – from hidden leases to spreadsheet slip-ups – can lead to compliance issues and financial misstatements.
This article identifies the most frequent lease accounting mistakes we encounter when we onboard new clients. At the same time, we provide practical advice on how to fix IFRS 16 problems. The goal is to help you and the finance team ensure accurate, consistent lease accounting and avoid IFRS 16 compliance issues.
We will be looking at the following 12 typical IFRS 16 lease accounting mistakes:
- Misclassifying embedded leases
- Not updating lease liability after modifications
- Failing to separate lease and non-lease components
- Over-reliance on spreadsheets (Excel)
- Misinterpreting lease term definitions
- Ignoring low-value lease exemptions incorrectly
- Lack of audit trail and documentation for judgments
- Applying the wrong discount rate
- Failing to recognize lease incentives correctly
- Inconsistent application across entities in a group
- Poor coordination across departments
- Overlooking IFRS 16 impacts on financial ratios and covenants
Misclassifying embedded leases
One frequent mistake is failing to recognize embedded leases hidden within service or supply contracts. An embedded lease exists when a contract for services or other goods implicitly gives the company control over the use of a specific asset . Missing these means omitting leases that should be on the balance sheet.
How to fix it: Perform a thorough contract review across departments to identify all leases, including those embedded in other agreements. House of Control recommends an organization-wide lease inventory, scrutinizing contracts for embedded assets and lease components.
Not updating lease liability after modifications
IFRS 16 requires lessees to reassess lease liabilities and right-of-use assets when key terms change – such as lease extensions, rent adjustments, or changes in scope. A common mistake is continuing to account for leases based on original terms, even after modifications.
How to fix it: Establish clear workflows where any lease changes trigger a reassessment. Remeasure lease liability based on updated payments and apply the correct discount rate per IFRS 16. Adjust the ROU asset accordingly and document the change. Use systems or alerts to ensure no modifications are missed in reporting periods.
Failing to separate lease and non-lease components
IFRS 16 requires lessees to separate lease components from non-lease components (such as service charges or maintenance) in a contract. A common error is not separating lease and non-lease components, instead accounting for the entire contract as a single lease.
How to fix it: Review lease contracts to identify and separate non-lease elements like maintenance, insurance, or services. Allocate consideration using observable standalone prices or estimates. Apply this consistently unless the practical expedient to combine components is elected. Document allocations and update them if contract terms change. Use standardized procedures to ensure accurate capitalization and expense classification under IFRS 16.
Over-reliance on spreadsheets (Excel)
Managing IFRS 16 with Excel is possible for very small lease portfolios, but over-reliance on spreadsheets is a widely cited pitfall.
How to fix it: For anything beyond a small lease portfolio, migrate to IFRS 16 software to reduce manual errors, improve audit trails, and automate updates like CPI adjustments or modifications. Spreadsheets lack controls, scalability, and consistency. Choose a system that centralizes lease data, supports compliance, and simplifies reporting. This enables faster closings and reduces dependency on individuals managing complex Excel models.
Misinterpreting lease term definitions
Another lease accounting mistake is misinterpreting the definition of the lease term. The lease term under IFRS 16 isn’t just the contractual period; it also includes extension or termination periods that the lessee is reasonably certain to exercise.
How to fix it: Create a clear policy to assess extension and termination options based on economic incentives, strategic asset value, and past behavior. Use checklists or decision trees, and document the rationale behind each decision. Reassess when facts change, involve relevant departments, and keep all lease term judgments centrally stored for audit purposes.
Ignoring low-value lease exemptions incorrectly
IFRS 16 also provides an exemption for low-value assets (generally defined as assets worth around $5,000 or less when new). This can simplify accounting by allowing low-value leases to be expensed instead of capitalized.
How to fix it: Define a consistent capitalization policy, applying the low-value exemption only to standalone assets under $5,000 when new. Maintain a log with asset type, value, and justification. Don’t group assets to bypass thresholds. Automate identification where possible and ensure exemptions are reviewed periodically for compliance.
Lack of audit trail and documentation for judgments
IFRS 16 involves significant judgments (like discount rates, lease terms, lease classification decisions). A frequent mistake is the lack of a proper audit trail or documentation for these judgments.
How to fix it: Document all significant judgments in a standard memo or lease system note, including the decision, rationale, and sources. Store centrally with version control. Review and update as needed, especially after changes in assumptions or lease terms. This ensures audit readiness and continuity if team members change.
Applying the wrong discount rate
IFRS 16 requires using the interest rate implicit in the lease if known, or otherwise the lessee’s incremental borrowing rate (IBR). A common error is defaulting to the group’s WACC or using outdated or oversimplified discount rates.
How to fix it: Define a policy for calculating lease-specific IBRs, based on term, currency, and lessee credit risk. Involve treasury if needed and document assumptions. Avoid using WACC, as it includes equity components. Use software or rate tables to apply correct, auditable discount rates consistently across leases.
Failing to recognize lease incentives correctly
Lease incentives, such as rent-free periods or reimbursement of fit-out costs, are common. These incentives must reduce the measurement of the lease liability and right-of-use asset. A typical mistake is expensing incentives or ignoring them in calculations.
How to fix it: Identify incentives during contract review. Reduce total lease payments by incentive amounts when calculating the present value. For cash incentives, deduct the amount from the ROU asset. Make sure incentive treatment is consistently applied across all leases and clearly documented in the lease file.
Inconsistent application across entities in a group
In groups with multiple subsidiaries, inconsistent IFRS 16 practices – such as different interpretations of lease terms or exemptions – lead to reporting mismatches and consolidation issues.
How to fix it: Develop a group-wide IFRS 16 policy covering key judgments, practical expedients, and system processes. Provide training and tools for local teams and ensure lease data is consolidated in a central platform. Perform periodic reviews to ensure uniform application and audit readiness.
Poor coordination across departments
Lease data often resides outside finance – in real estate, operations, or procurement. Without structured coordination, leases are missed, modified without notice, or misinterpreted.
How to fix it: Create a cross-functional process for lease intake and change tracking. Assign clear responsibilities for notifying finance of new or amended leases. Use standardized intake forms or workflows, and periodically reconcile lease commitments with accounting records to ensure completeness.
Overlooking IFRS 16 impacts on financial ratios and covenants
Capitalizing leases increases reported debt and affects key metrics like EBITDA and leverage ratios. A common mistake is failing to assess or communicate how IFRS 16 affects loan covenants or investor perception.
How to fix it: Model IFRS 16’s impact on your key ratios before reporting. If ratios are used in covenants, consult with lenders early to adjust thresholds or agree on “pre-IFRS 16” metrics. Provide disclosures and reconciliations to help stakeholders understand the accounting effects.
