Quick Guide to IFRS16 Lease Accounting
IFRS16 is the accounting standard used by organisations reporting under International Financial Reporting Standards (IFRS) to manage lease accounting.
If you report under IFRS and your business leases assets, IFRS16 requires those leases to be recognised on the balance sheet. This brings greater transparency to financial reporting, but it also introduces more complexity.
In this guide, we break it down in a simple way to help you understand what it means in practice.
What is IFRS 16?
IFRS 16 introduced a new approach to lease accounting using the right-of-use model which means if an organisation has control over an asset they are renting, then for accounting purposes this is considered a lease. Under IFRS 16, this lease must be recognised on the company’s balance sheet.
This means recording both the value of the asset being used and the obligation to make future payments. Even though the business does not own the asset, it still reflects its use and the associated liability in the accounts.
What changed from IAS 17 to IFRS 16?
Under IAS 17, leases were split into two categories: finance leases and operating leases. Finance leases were included on the balance sheet, but operating leases were often treated as a simple expense and kept off the balance sheet.
This created inconsistencies. Businesses could appear to have fewer liabilities than they actually did, simply because of how leases were classified.
IFRS16 removed this distinction for lessees. Most leases are now recognised on the balance sheet, which provides a more accurate and transparent view of a company’s financial position.
Why was IFRS 16 introduced?
The move from IAS 17 to IFRS 16 was designed to improve transparency and consistency in financial reporting.
By bringing leases onto the balance sheet, financial statements now give a clearer picture of a company’s assets and obligations. This helps investors, stakeholders and finance teams better understand the financial health of a business. It also ensures that similar transactions are treated in a consistent way across organisations.
What does IFRS 16 require in practice?
Although the concept is simple, the practical work involved can be more detailed.
Organisations need to identify all lease arrangements across the business and gather key information such as lease terms, payment schedules and any options within the contract. From there, they calculate the value of the lease liability, apply interest over time, and account for depreciation of the asset.
These calculations are not a one-off exercise. They need to be updated regularly as leases change, new contracts are added, or assumptions are adjusted.
For organisations with a small number of leases, this may be manageable. However, as the number of leases grows, so does the level of effort required to maintain accuracy.
Are there any exceptions?
There are some limited cases where leases do not need to be treated in the same way.
Short-term leases, typically those lasting less than 12 months, and leases for low-value assets can be excluded. In these cases, the accounting treatment remains simpler and does not require recognition on the balance sheet.
How does IFRS 16 affect financial reporting?
IFRS 16 changes how leases appear in financial statements.
On the balance sheet, organisations now recognise both a right-of-use asset and a lease liability. In the profit and loss account, lease expenses are replaced by depreciation of the asset and interest on the liability.
This can change the timing and presentation of costs, particularly in the earlier stages of a lease, and may impact key financial metrics and ratios, say EBITDA..
Where do businesses typically struggle?
In many organisations, lease accounting starts in Excel. It is a natural place to begin, and for a small number of leases it can work well.
However, as requirements grow, spreadsheets often become difficult to manage. Calculations become more complex, updates take longer, and multiple versions can appear. Knowledge is often held by one or two individuals, which creates risk if processes are not fully documented or shared.
Supporting audit requirements can also become challenging, particularly when there is a need to demonstrate how calculations have been applied consistently across the business.
How can software help?
As lease accounting becomes more complex, many organisations look for a more structured approach.
Lease16 is Aramar’s lease accounting solution, built on IBM Planning Analytics. It is designed to manage lease accounting requirements under IFRS16, and now also supports FRS102 lease accounting.
- Configured to manage any leasing scenario specific to your business requirements.
- Manages the complete lease accounting process from contract creation through to expiration and modification.
- Includes rules to calculate right-of-use (ROU) assets and lease liabilities, including future payments, interest, and depreciation.
- Reporting in Excel and web front end
Lease16 allows you to easily oversee lease liability, including lease payments, interest payments, depreciation, and other services throughout the life of the contract. Using IBM Planning Analytics the sophisticated software stores data in multi-dimensional cubes, enabling users to slice and dice the figures for analysis, forecasting and what-if scenario modelling. All within an easy-to-use lease management software solution.
Summary
IFRS16 marked a significant shift in lease accounting, moving away from the IAS 17 approach and bringing most leases onto the balance sheet.
While this improves transparency and consistency, it also introduces additional complexity for finance teams, particularly where multiple leases are involved.
With the right approach and the right tools, organisations can manage this complexity effectively and produce accurate, auditable results.
Need support with IFRS16 lease accounting?
If you are reviewing how to manage lease accounting under IFRS16 or FRS102, contact us today we would love to help.