The complete guide to IFRS 16 compliance

Master IFRS 16 with clarity and confidence

Learn how to apply IFRS 16 with clarity and confidence.
Discover proven practices, avoid common reporting mistakes, and stay compliant with ease.

IFRS 16 explained:
What this page covers

IFRS 16 has fundamentally changed how companies account for leases, shifting operating commitments onto the balance sheet and transforming key financial metrics.

This page explores the standard from every angle, its business impact, technical requirements, operational challenges, and the lessons learned since implementation.

It combines practical insights from finance professionals and auditors with real-world best practices for accurate, transparent, and efficient reporting across entities and industries.

Whether you are new to IFRS 16 or refining established processes, this resource provides the clarity and structure needed to stay compliant and in control.

IFRS 16 is the international accounting standard that governs lease accounting for organizations reporting under the International Financial Reporting Standards.

Implemented in 2019, it replaced IAS 17 and fundamentally changed how companies recognize leases on the balance sheet.

Under IFRS 16, all leases, except those meeting specific exemptions, must now appear on the balance sheet as a right-of-use (ROU) asset and a corresponding lease liability.

This ensures greater transparency by revealing the true scale of a company’s leasing commitments.

Before IFRS 16, many leases remained off the balance sheet, which made it difficult for investors, auditors, and regulators to compare financial statements accurately.

The new standard was designed to:

Increase visibility of liabilities and assets arising from leases.
Improve comparability across organizations and industries.
Reduce hidden debt and strengthen financial transparency.

IFRS 16 applies to most entities that lease assets, from real estate and vehicles, to IT equipment and machinery.

If your organization prepares IFRS-based financial statements, you must assess every contract to determine whether it contains a lease and account for it accordingly.

The business and financial impact of IFRS 16

When IFRS 16 came into effect, it reshaped how companies report, analyse, and communicate their financial performance. The shift from off-balance-sheet lease accounting to full recognition of lease liabilities and right-of-use assets has had a deep and lasting impact.

Understanding these effects is crucial not only for compliance but for strategic decision-making, investor relations, and performance measurement.

A New Balance Sheet Reality

Under the old IAS 17 standard, many leases were classified as operating leases and kept off the balance sheet.

This meant companies could use leased assets without recognising related debt, making balance sheets appear lighter and leverage ratios lower.
IFRS 16 removed that distinction by bringing nearly all leases onto the balance sheet.

For most organisations, this means:

An increase in reported assets and liabilities, since right-of-use assets and lease obligations are now recognised.
A higher level of transparency for investors, lenders, and auditors who can now see the true scale of lease commitments.
More complex reporting, as companies must track and re-measure these items throughout the lease term.

The introduction of IFRS 16 has therefore improved comparability between companies while also changing how external stakeholders perceive financial health.

See: How will IFRS 16 affect annual financial statements?

Effects on key financial ratios

Because lease liabilities are now recorded as debt, and right-of-use assets appear as fixed assets, several core financial ratios are affected:

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) typically increases, since lease expenses that were previously treated as operating costs are now split into depreciation and interest.
Operating profit and EBIT also rise slightly, as interest expense moves below the operating line.
Leverage ratios such as debt-to-equity increase because the balance sheet now includes lease liabilities.
Return on assets (ROA) and return on capital employed (ROCE) often decline due to higher asset bases.

These changes can alter the interpretation of performance trends, especially for capital-intensive industries such as retail, aviation, and logistics.

Analysts and CFOs must therefore communicate clearly to investors about how IFRS 16 affects reported metrics versus underlying operations.

See: The real impact of IFRS 16 on EBITDA: What you need to know

Implications for financial planning and forecasting

Beyond compliance, IFRS 16 influences how companies plan, budget, and forecast.
Because lease liabilities are now treated similarly to debt, they can affect financing capacity, debt covenants, and internal targets.

Finance teams must adapt their forecasting models to account for:

Lease repayments and interest as part of cash-flow projections.
The amortisation of right-of-use assets, which changes depreciation profiles.
The impact on key indicators used in management incentive plans or investor communications.

Accurate forecasting also depends on correctly handling lease modifications, renewals, and reassessments, which can alter future liabilities.

Without structured processes, these adjustments can quickly distort projections.

Investor and stakeholder communication

IFRS 16 requires not only new calculations but also clear messaging.
Companies also need to explain to boards and investors why EBITDA, assets, and liabilities have changed, even if underlying operations remain stable.
Transparent communication helps prevent confusion and ensures stakeholders interpret financial statements in context.

Some companies now use supplemental disclosures to present pre-IFRS 16 and post-IFRS 16 metrics side by side.
This hybrid approach can ease comparisons during transition years and support analysts who follow industry benchmarks.

Sector-specific considerations

The magnitude of IFRS 16’s impact varies widely between industries:

Retailers and hospitality chains often experience large increases in reported debt due to store and property leases.
Transportation and logistics companies see significant changes to both assets and EBITDA.
Manufacturing and professional services generally experience more moderate effects.

Understanding these sector differences helps explain why IFRS 16 is not just an accounting update but a structural shift in how business models are perceived.

Lessons learned since implementation

Several years into IFRS 16 adoption, a few consistent lessons have emerged:

Centralised lease data management is essential. Fragmented spreadsheets cannot handle the complexity of ongoing lease updates.
Cross-functional collaboration matters. Accounting, treasury, procurement, and legal teams all contribute data that affects IFRS 16 calculations.
Documentation and audit trails save time. Auditors now expect clear visibility of how each lease was assessed and measured.
Early communication with stakeholders reduces surprises. Clear explanations build confidence among investors and lenders.

The companies that approached IFRS 16 proactively have generally found the transition less disruptive and have gained better insight into their long-term commitments.

Technical and policy nuances of IFRS 16

Understanding IFRS 16 in theory is one thing; applying it in daily accounting practice is another.
The standard contains numerous definitions, policy choices, and exceptions that require judgment and consistency.

This section highlights the most important technical areas finance teams must navigate, based on lessons learned across industries since adoption.

Defining a lease: More than a contract

A lease, under IFRS 16, exists when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

In practice, this definition reaches beyond obvious rental agreements.
Contracts for IT equipment, vehicles, or dedicated manufacturing assets may all include embedded leases even when labelled as service contracts.

The challenge lies in assessing whether the supplier retains substantive substitution rights or whether the customer truly controls the asset’s use.

Misinterpreting this can lead to under-reporting of liabilities and inaccurate disclosures.
Establishing a consistent assessment policy — often supported by checklists or decision trees — is critical for accuracy and audit readiness.

See: IFRS 16 implementation: Step-by-step guide for lease accounting compliance

Recognition and measurement

Once a lease is identified, the lessee recognises two key components:

A right-of-use asset (ROU) representing the right to use the underlying asset, and
A lease liability representing the obligation to make lease payments.

At commencement, the liability equals the present value of future lease payments discounted by the incremental borrowing rate (IBR), unless an implicit rate is readily available.
Selecting the IBR is one of the most judgmental areas of IFRS 16.
It should reflect the rate a company would pay to borrow, over a similar term and security, to obtain an asset of similar value.

Companies often establish IBR matrices by geography, entity, and currency.
Regularly reviewing these rates ensures ongoing compliance and consistency when new leases or modifications occur.

Short-Term and Low-Value lease exemptions

IFRS 16 allows lessees to exclude certain leases from balance-sheet recognition:

Short-term leases with terms of 12 months or less, and
Leases of low-value assets, such as small office equipment.

While these exemptions simplify accounting, they are also a frequent source of error.
Applying them inconsistently across subsidiaries or misjudging what qualifies as “low value” can distort results.

A clear internal threshold and documentation process help maintain comparability.

See: IFRS 16 exemptions: Short-Term and Low-Value lease rules

Variable lease payments and modifications

Not all lease payments are fixed. Some depend on usage, performance, or inflation indices.
Only payments linked to an index or rate (for example CPI) are included in the lease liability; those based on actual usage or sales are treated as expenses when incurred.

Lease modifications such as extending a term, changing space, or agreeing to new payment terms, require re-measurement of both the liability and the right-of-use asset.

The complexity grows when modifications overlap with reassessments of discount rates or options.
Documenting assumptions and maintaining version control is essential to avoid misstatements.

See: IFRS 16 lease terminations & buyouts explained

Terminations and buyouts

When a lease ends early or the lessee purchases the asset, IFRS 16 requires derecognition of both the right-of-use asset and the related liability, with any difference recognised in profit or loss.

This sounds simple, yet many companies struggle to track when buyouts actually occur, especially across multiple systems or local entities. Failure to recognise terminations promptly can overstate assets and liabilities and misrepresent financial performance.

Best practice involves setting up a clear workflow with automatic triggers — for example, when an asset’s ownership transfers or a lease contract expires.

Transition methods and practical expedients

During initial adoption, companies could choose between full retrospective and modified retrospective transition methods.

Although transition is now complete for most organisations, these choices still affect comparability of historical figures and should remain documented for transparency.

In ongoing reporting, practical expedients such as portfolio application or not separating non-lease components can simplify processes, but they must be applied consistently.

Disclosure and audit focus areas

Auditors and regulators now focus heavily on the completeness of lease populations and the accuracy of discount rates.

Typical disclosure requirements include:

Maturity analysis of lease liabilities.
Expense split between depreciation and interest.
Variable lease payments not included in liabilities.
Qualitative information about extension and termination options.

Disclosures are not just compliance checkboxes; they demonstrate management’s control over lease accounting and data integrity.

See: IFRS 16, year-end closing and annual financial statements

Building consistency

A well-maintained IFRS 16 policy manual should define:

Decision criteria for identifying leases and applying exemptions.
Procedures for determining discount rates and handling modifications.
Responsibilities between accounting, procurement, and legal teams.

Periodic internal reviews help ensure that new contracts follow established policies and that assumptions remain current as markets evolve.

Operational and reporting challenges in practice

Mastering the technical rules of IFRS 16 is only half the battle. The real difficulty lies in applying those rules efficiently, across entities and reporting cycles, while meeting tight closing deadlines.

This section focuses on the operational realities finance teams face and the practices that help maintain control and accuracy.

The year-end pressure cooker

Each year, finance departments confront the same question: “Are our lease figures complete, accurate, and ready for disclosure?”

IFRS 16 reporting intensifies that pressure because the standard requires ongoing reassessment of lease data, discount rates, and modifications.

Common challenges include:

Missing new leases or extensions that were signed late in the year.
Incorrect lease-term updates after management decisions.
Late identification of terminations or buyouts.

When these issues surface close to deadline, reconciliations stall and audit queries multiply.
Teams that establish a rolling IFRS 16 review process, checking data quarterly rather than annually, report smoother closes and fewer last-minute surprises.

Multi-entity and multi-currency complexities

Large groups rarely operate under one currency or discount rate.

IFRS 16 requires each subsidiary to measure lease liabilities using its own functional currency and incremental borrowing rate, then translate them for group consolidation.

Even small differences in discount rates or foreign-exchange movements can materially affect group-level IFRS 16 results.

Key recommendations:

Maintain a central rate library that lists approved discount rates by entity, term, and currency.
Document how translation differences are recognised, in profit or loss or as part of the foreign
Align accounting calendars across subsidiaries to avoid timing mismatches in intercompany leases.

Without coordination, group consolidation can become a patchwork of conflicting assumptions.
Consistent policies and communication between group finance and local controllers are essential.

See: Managing IFRS 16 reporting across entities, currencies, and subsidiaries with consolidation accuracy

Data quality and lease register integrity

Most companies underestimate the ongoing effort required to keep lease registers complete and accurate.
Leases evolve: premises are sublet, vehicles replaced, or IT equipment returned early. Without disciplined updates, data quality deteriorates quickly.

Effective controls include:

Integrating procurement and accounting workflows so new contracts trigger lease assessment automatically.
Regular reconciliations between lease registers, general ledger, and fixed-asset modules.
Clear ownership, each business unit should know who is responsible for reporting lease changes.

Auditors increasingly test data completeness rather than recalculating values, so traceability of the underlying contracts is more important than ever.

From compliance to communication

Producing numbers is not enough; finance teams must also explain them.
IFRS 16 disclosures in the financial statements should tell a coherent story:

How the company manages its leasing activities.
The nature of lease commitments and variable components.
The impact of leases on cash flow and capital structure.

Consistent narrative disclosure builds investor confidence and demonstrates that management understands the implications of the standard, not merely the mechanics.

See: IFRS 16: Simplifying the calculation and reconciliation of lease liabilities and right-of-use assets

Sustaining IFRS 16 over time

The first year of adoption may be behind us, but IFRS 16 remains a living process.

New business models, cloud services, subscription-based equipment, flexible offices—constantly raise questions about whether contracts include leases.
Regulators also continue to refine interpretations and disclosure expectations.

Companies that treat IFRS 16 as part of their continuous finance operations, rather than a one-off compliance project, are best prepared for these changes.

Embedding lease management into monthly and quarterly routines ensures that data, assumptions, and disclosures remain accurate throughout the year.

The impact of IFRS 16 on 12 different financial ratios

The IFRS 16 lease accounting standard impacts financial statements. This is how the standard affects financial ratios that investors typically use to measure company performance.

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IFRS 16 cheat sheet

Understanding IFRS 16 can be complex—but it doesn’t have to be. This cheat sheet breaks down the essentials of the lease accounting standard so you can quickly get up to speed and stay compliant.

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Best practices for contract management

Efficient contract management processes are essential for businesses of all sizes. We’ve gathered the best tips for contract management to help you improve your approach and outcomes.

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IFRS 16, year-end closing and annual financial statements

The IFRS 16 standard for lease accounting impacts several year-end activities as well as the annual financial statements. This article explores what you need to know, and how to prepare.

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How does IFRS 16 affect business decisions?

To lease or not to lease, that’s the question that impacts business decisions most. However, the IFRS 16 standard may also have real-world implications.

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Common mistakes and best practices

Even with several reporting cycles behind them, many organizations still encounter recurring IFRS 16 errors.
Most are not caused by misunderstanding the standard itself but by practical issues such as missing data, inconsistent assumptions, or gaps in internal coordination.

Understanding where these mistakes occur is the first step toward building a reliable and efficient compliance process.

Incomplete Lease Population

The most widespread mistake is failing to identify all relevant leases.
Contracts that include embedded lease components, such as dedicated equipment within service agreements or exclusive use of IT servers, often remain off the register.
When auditors review these contracts later, they find omissions that can materially affect liabilities.

What we think is the best practice:
Perform periodic cross-checks between the lease register, procurement data, and expense accounts.
Any recurring payment that looks like rent or equipment use should be reviewed under the IFRS 16 definition of a lease.

Incorrect discount rates

Selecting an appropriate incremental borrowing rate (IBR) can be difficult, particularly for decentralized organizations.
Some entities apply a group-wide rate without considering local credit risk or currency effects, leading to distorted valuations.

What we think is the best practice:
Document a clear policy for determining IBRs.
Maintain an approved matrix by entity, currency, and lease term, and review it annually.
Changes in financing conditions should trigger a reassessment to keep calculations consistent and supportable.

Misclassification of Lease Terms and Options

A common error is failing to reassess lease terms when management decisions change.
If an extension option becomes reasonably certain or a termination option is exercised, the lease liability and right-of-use asset must be re-measured.
Delays in recognising these changes can lead to outdated figures.

What we think is the best practice:
Implement a process that tracks contract amendments and management decisions throughout the year.
Whenever terms are renegotiated or options confirmed, update the accounting records promptly.

Overlooking modifications, terminations, and buyouts

Leases rarely remain static.
Modifications such as changing space, upgrading equipment, or buying out a contract early require re-measurement under IFRS 16.

Many companies record these events as operating expenses or remove them informally, bypassing the required accounting treatment.

What we think is the best practice:
Create a structured workflow for handling lease changes.
Ensure that each modification or termination is supported by documentation showing how it was assessed and accounted for.

Errors in applying exemptions

Short-term and low-value exemptions simplify accounting, but they can be misapplied.
Some subsidiaries adopt different thresholds or overlook renewal options that extend lease terms beyond twelve months.

What we think is the best practice:
Define clear internal limits for “low-value” assets and apply them consistently across the group.
Document all exemption decisions with supporting rationale to facilitate audit review.

Data and version control weaknesses

Maintaining accuracy across hundreds of leases in spreadsheets introduces risk.
Multiple editors, file versions, and ad-hoc formulas make it difficult to trace or verify calculations.
Audit challenges often stem from incomplete change histories rather than from conceptual errors.

What we think is the best practice:
Adopt a controlled environment for storing and updating lease data.
Use unique identifiers for each contract and retain historical versions of key calculations.
Regular internal reconciliations between registers and general ledger balances ensure data integrity.

Disclosure inconsistencies

Even when calculations are correct, disclosure errors can misrepresent the company’s position.
Examples include mismatched totals between tables, missing maturity analyses, or incorrect narrative explanations.

What we think is the best practice:
Prepare IFRS 16 disclosures from validated data sets and perform a tie-out to the trial balance.
Assign one reviewer to confirm that every figure in the notes reconciles with the ledger and that qualitative descriptions align with policy wording.

FAQ: What finance teams ask most often

What types of contracts fall under IFRS 16?

IFRS 16 applies to any arrangement that conveys the right to control the use of an identified asset for a period of time in exchange for payment.

That includes office space, vehicles, machinery, IT equipment, and even embedded leases inside service contracts.

Each agreement must be reviewed individually to confirm whether it meets the definition of a lease.

How do short-term or low-value leases work?

Leases shorter than twelve months and assets of low individual value such as laptops or small printers can be exempt from balance-sheet recognition if the company applies the exemption policy consistently.

However, renewal options and group policy differences can complicate the analysis, so regular reviews are essential.

How does IFRS 16 affect EBITDA and other key ratios?

Operating lease expenses are replaced by depreciation and interest costs, which pushes EBITDA higher while increasing reported liabilities.

Understanding and communicating this shift is crucial when explaining performance trends to boards and investors.

See: The real impact of IFRS 16 on EBITDA: What you need to know

What are auditors focusing on now that IFRS 16 is established?

Audit reviews typically emphasise completeness of the lease population, discount-rate selection, and proper accounting for modifications and terminations.

Maintaining transparent documentation and clear version control remains the strongest defence against audit findings.

How can finance teams stay ahead as leasing models evolve?

Subscription-based equipment, co-working spaces, and cloud-service contracts continue to blur the boundaries between leases and services.

Periodic policy reviews, staff training, and clear cross-department collaboration ensure the organisation applies IFRS 16 consistently as business models change.