The IFRS lease accounting standard governing lease identification, right-of-use assets, lease liabilities, expenses, and disclosures.
IFRS 16 Leases is the IFRS Accounting Standard that governs how lessees and lessors identify, recognize, measure, present, and disclose leases. For lessees, it generally requires a right-of-use asset and a lease liability for leases longer than 12 months, unless the underlying asset is of low value and the lessee elects the recognition exemption.
IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019. It replaced IAS 17 for entities applying IFRS Accounting Standards.
The analysis starts with the right to control an identified asset, not with the contract’s label. A service contract can contain a lease, and a contract called a lease may include non-lease service components.
The customer generally controls the use of an identified asset when it has both:
A supplier’s substantive right to substitute another asset can prevent the asset from being identified. Protective rights that restrict unsafe or unauthorized use do not necessarily prevent the customer from controlling use.
At the commencement date, a lessee generally measures the lease liability at the present value of lease payments not yet paid.
The discount rate is the interest rate implicit in the lease when that rate can be readily determined. Otherwise, the lessee uses its incremental borrowing rate.
The initial right-of-use asset generally starts with the initial lease liability and is adjusted for:
Lease payments included in the liability can include fixed payments, in-substance fixed payments, certain index- or rate-based variable payments, qualifying residual value guarantees, and exercise prices or termination penalties when the lease-term assessment requires them.
Assume a lessee agrees to make five annual payments of $100,000 at each year-end. The discount rate is 5%. For simplicity, assume there are no initial direct costs, incentives, prepayments, restoration obligations, variable payments, or residual value, and ownership does not transfer.
The initial lease liability is the present value of the five payments:
Under these assumptions, the initial right-of-use asset is also $432,948.
During year 1:
After the $100,000 payment, the closing lease liability is approximately:
If the right-of-use asset is depreciated straight-line over the five-year lease term, annual depreciation is approximately $86,590. First-year interest plus depreciation is therefore about $108,237. The total expense normally declines over time because interest falls as the liability is repaid, while straight-line depreciation remains constant.
This simplified example is instructional. Actual measurements can change because of payment timing, lease incentives, options, residual value guarantees, reassessments, modifications, impairment, foreign exchange, taxes, and rounding.
After commencement, the lessee generally:
Not every variable payment is included in the initial liability. Variable payments excluded from the liability are generally recognized when the event or condition triggering them occurs, subject to the applicable requirements.
A lessee may elect not to recognize right-of-use assets and lease liabilities for qualifying:
Payments under an elected exemption are generally recognized as expense over the lease term. These are recognition exemptions, not opt-outs from every IFRS 16 requirement. The entity must still identify leases, apply the election consistently as required, and provide applicable disclosures.
IFRS 16 also has scope exclusions and interacts with other Standards. Users should confirm the current scope for rights involving mineral resources, biological assets, service concession arrangements, and specified licensing rights rather than assuming every right-to-use contract falls under the same model.
Lessors continue to classify each lease as an operating lease or finance lease. A finance lease transfers substantially all risks and rewards incidental to ownership; an operating lease does not.
This means the phrase single lease model applies to lessee recognition, subject to exemptions. It does not eliminate lessor classification. Sale-and-leaseback transactions and subleases also require additional analysis.
Compared with the former off-balance-sheet operating lease model for lessees, IFRS 16 often:
Cash flow presentation also changes. The principal portion of recognized lease payments is generally classified within financing activities. Interest classification follows the entity’s applicable IAS 7 policy, while payments for exempt leases and variable payments not included in the liability are generally operating cash flows.
These effects are not automatically improvements or deteriorations in economics. Analysts should adjust historical comparisons and verify how covenant and non-GAAP measures define debt, interest, rent, and EBITDA.
Both IFRS 16 and U.S. GAAP Topic 842 generally put lessee right-of-use assets and lease liabilities on the balance sheet, but they are not identical.
| Issue | IFRS 16 | U.S. GAAP Topic 842 |
|---|---|---|
| Lessee classification | Generally one recognition and expense model, subject to exemptions. | Retains finance and operating lease classification for lessees. |
| Expense pattern | Depreciation plus interest generally creates a front-loaded total expense for an individual lease. | Finance leases generally have separate interest and amortization; operating leases generally retain a single lease expense pattern. |
| Low-value exemption | Includes an exemption for qualifying low-value underlying assets. | Does not contain the same general low-value recognition exemption. |
| Detailed application | Discount rates, reassessments, variable payments, modifications, and other provisions differ. | Topic 842 requirements must be researched independently rather than inferred from IFRS 16. |
An entity should apply its governing framework rather than translate a conclusion mechanically from the other standard.
Review the financial statements and lease note for:
This page is educational and does not provide accounting, audit, legal, tax, valuation, or investment advice. Apply the current Standard, local adoption requirements, contract facts, and professional judgment.