IFRS 16 lease terminations & buyouts explained

Lease terminations and buyouts are frequent IFRS 16 challenges. Getting them right means more than compliance: it safeguards EBITDA, strengthens group reporting, and reduces audit friction. This article explains how.

IFRS 16 lease terminations and buyouts are everyday headaches for finance teams. A subsidiary closes an office, a car fleet is returned mid-contract, or management buys out an asset instead of renewing.

Each scenario is common – and each can create messy accounting entries, inconsistent consolidation adjustments, and difficult audit questions if not handled correctly.

This article explains what counts as a termination under IFRS 16, the difference between termination and buyout, and how to handle early termination, partial termination, and end-of-lease events. You’ll find a step-by-step guide to the accounting treatment, disclosure requirements, and common pitfalls, along with best practices and practical tips on how system support can turn complexity into control.

Why lease terminations and buyouts are a common challenge

Under IFRS 16, leases are not static. They must be adjusted when businesses move, renegotiate, close offices, or buy out assets. Each event has accounting consequences.

A lease termination, whether early or at the end of lease, affects both the right-of-use (ROU) asset and the lease liability. A buyout requires reclassification: instead of a lease, the group now owns the underlying asset directly. Without a clear process for consolidation adjustments, numbers risk being misstated. This has consequences for EBITDA, covenants, and audit discussions.

For CFOs, the real challenge is not the technical rules themselves, but ensuring that the rules are applied consistently across subsidiaries, especially when local GAAP vs IFRS differences are involved.

What counts as a lease termination?

In IFRS 16, a termination is the full or partial end of a lease contract before its original expiry. Common examples include:

• Early termination: The lease ends before maturity, often due to restructuring or downsizing.

• Scheduled end-of-lease: The lease reaches its contractual end date without renewal.

• Partial termination: Some leased assets under a contract are returned while others continue.

Partial terminations are particularly challenging. They require derecognition of the terminated portion of the lease liability and ROU asset, combined with a remeasurement of the remaining contract. Many groups underestimate the complexity here, and this is a frequent source of audit findings.

Termination vs Buyout: Key differences under IFRS 16

A buyout is not the same as a termination.

• Termination: The lease contract ends, and the group no longer controls the underlying asset. The ROU asset and liability are removed, with a gain or loss recognized.

• Buyout: The lease contract ends, but the group acquires the asset. The ROU asset and lease liability are derecognized, and the purchase price is recognized as a tangible asset (often under IAS 16 Property, Plant and Equipment).

This distinction is crucial. Misclassifying a buyout as a termination – or vice versa – leads to incorrect accounting entries and misleading group figures.

Terminations, modifications, or both?

In practice, the line between a termination and a modification is not always clear. Some contracts are partly terminated and partly modified. For example:

• A company downsizes office space but extends the lease term for the remaining area.

• A vehicle lease portfolio is reduced in size, but the remaining fleet is refinanced at new rates.

In these cases, IFRS 16 requires both derecognition and remeasurement. The terminated portion is treated as a termination, while the remaining contract is treated as a modification. For CFOs, this is where judgment, documentation, and system support are essential to ensure consistency and avoid misstatements.

Step-by-step accounting treatment

How should you handle lease terminations and buyouts in practice? 

1. Remove the lease liability. Derecognize the carrying amount of the lease liability related to the terminated portion of the contract.

2. Remove the ROU asset. Derecognize the carrying amount of the right-of-use asset relating to the lease.

3. Recognize gain or loss. Any difference between the two goes to profit or loss. This is common in early termination or partial termination cases.

4. Handle buyouts separately. If the contract ends in a buyout, the payment made becomes the cost of the new asset. This requires consolidation adjustments to reclassify from lease accounting to owned asset accounting.

Consistency is critical. The same type of transaction must be treated identically across all subsidiaries. Without this, consolidation entries become messy and audits drag on.

Impact on profit and key metrics

Lease terminations and buyouts can have a major impact on group performance:

• EBITDA: Gains or losses on termination are recognized below EBITDA, but lease expenses disappearing may distort comparability.

• Leverage and covenants: Eliminating lease liabilities may improve leverage ratios. However, if the buyout is financed with new debt and the purchase price exceeds the remaining lease liability, reported debt can increase.

• Volatility: Early terminations can create one-off gains or losses that affect quarterly results.

For CFOs, it is essential to not only apply the rules correctly but also explain the financial impact clearly to investors, boards, and lenders.

Disclosure requirements for lease terminations and buyouts

IFRS 16 requires companies to disclose information that enables users of financial statements to assess the effect of leases on the financial position, performance, and cash flows.

For lease terminations and buyouts, this includes:

• Nature and impact: Explanation of significant lease terminations or buyouts during the reporting period.

• Profit or loss effect: Gains or losses recognized on termination.

• Transition of ownership: For buyouts, disclosure of the new asset classification and recognition.

• Consistency across subsidiaries: In consolidated accounts, CFOs must ensure that local disclosures are aligned and reconciled – otherwise, terminations reported locally may not appear transparently at group level.

Transparent disclosure builds trust and helps avoid regulatory or auditor challenges.

Common pitfalls: What to watch out for

Despite clear guidance, many groups stumble on the same issues. One of the most frequent mistakes is confusing a modification with a termination. Not all changes end a lease; some are modifications that require remeasurement rather than derecognition, yet they are often treated incorrectly. 

Partial terminations also create challenges. Many companies fail to split the terminated and the continuing portion of a contract, which leads to errors in measurement and reporting. A further source of inconsistency arises when subsidiaries record terminations differently, resulting in elimination entries that do not align at group level. 

Finally, poor documentation is a recurring problem. Without audit-ready records, both terminations and buyouts can quickly become red flags in the consolidation process. Each of these pitfalls carries real risks, from misstated numbers and prolonged audits to a loss of credibility with investors and lenders.

Best practices: What we think at House of Control

From our perspective, three elements make the difference between firefighting and real control. The first is documentation, where clear definitions, consistent treatment, and a solid audit trail for each lease termination or buyout provide a reliable foundation. 

The second is system support, with solutions capable of handling early terminations, partial terminations, and buyouts while producing automatic accounting entries and consolidation adjustments. 

The third is process discipline, with defined roles, approvals for changes, and alerts when data is incomplete or inconsistent. With the right software, you register changes once, generate accounting entries automatically, and roll them up into group-level elimination entries. The result: faster reporting, fewer surprises, and smoother audits.

Turning compliance into control

Lease terminations, partial terminations, and buyouts are part of real business life. IFRS 16 requires precise accounting entries and careful disclosure, but the real payoff is greater: when handled well, these events give CFOs better insight into lease portfolios, cost drivers, and long-term asset strategies.

Want to see how House of Control’s IFRS 16 software can simplify IFRS 16 lease terminations, buyouts, and consolidation adjustments? Contact us for a demo. We’ll show you how to cut manual work, ensure compliance, and give management reliable numbers.