IFRS 16 Explained: Lease Accounting Under International Standards

Lease accounting is an essential part of financial reporting for businesses that rely on leased assets—whether it’s property, equipment, or vehicles. With the introduction of IFRS 16 – Leases, the International Accounting Standards Board (IASB) made a fundamental shift in how companies recognize leases on their financial statements.

This standard eliminates the distinction between operating and finance leases for lessees, significantly increasing transparency but also adding complexity to accounting processes. Understanding and applying IFRS 16 correctly is crucial for financial professionals to ensure compliance, enhance reporting accuracy, and support strategic decision-making.

Whether you’re a finance leader, accountant, or internal auditor, AZTech’s Finance & Accounting Training Courses provide the knowledge and practical tools to implement IFRS 16 effectively across your organization.

What is IFRS 16?

IFRS 16 – Leases is an international accounting standard that came into effect on 1 January 2019, replacing IAS 17. It introduces a single lessee accounting model requiring nearly all leases to be capitalized on the balance sheet.

Under IFRS 16, lessees must recognize:

• A right-of-use asset, representing their right to use the leased item

• A lease liability, representing their obligation to make lease payments

This model ensures that lease-related assets and liabilities are no longer hidden in the notes of financial statements, improving transparency for investors and stakeholders.

Why IFRS 16 Matters

Before IFRS 16, many companies used off-balance sheet accounting for operating leases, making financial analysis and comparison difficult. IFRS 16 changes this by:

• Enhancing comparability across industries and jurisdictions

• Providing a more faithful representation of a company’s financial position

• Increasing asset and liability visibility

• Affecting key financial ratios such as EBITDA, return on assets, and debt-to-equity

The implications are significant, particularly for industries with substantial lease commitments such as retail, logistics, aviation, and real estate.

Key Concepts of IFRS 16

1. Definition of a Lease

Under IFRS 16, a contract is (or contains) a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

This assessment involves:

• Identifying the asset

• Determining the right to obtain substantially all economic benefits

• Confirming control over how the asset is used

2. Lessee Accounting Model

IFRS 16 requires lessees to recognize:

• A right-of-use (ROU) asset, initially measured at cost

• A lease liability, equal to the present value of future lease payments

Subsequently, the ROU asset is depreciated, and the lease liability is reduced as lease payments are made, with interest expense recognized on the liability.

Learn how to apply these steps correctly in the Certificate in Practical Finance and Accounting Training Course, which provides practical tools for lease calculations, recognition, and reporting.

3. Lease Term and Discount Rate

Determining the correct lease term (including options to extend or terminate) and discount rate (typically the lessee’s incremental borrowing rate) is critical, as these inputs significantly impact lease liability calculations.

Professionals must apply judgment and document their assumptions, especially in complex agreements.

4. Exemptions for Short-Term and Low-Value Leases

IFRS 16 allows lessees to exempt:

• Short-term leases (12 months or less)

• Leases of low-value assets (e.g., laptops, small office equipment)

For these, lease payments are recognized on a straight-line basis over the lease term—similar to operating leases under IAS 17.

These exemptions are explained in the Accounting, Finance Policies & Procedures Training Course, which helps organizations create consistent accounting policies aligned with IFRS.

5. Lessor Accounting

Lessor accounting remains largely unchanged under IFRS 16. Lessors continue to classify leases as either:

• Operating leases: Recognize lease income on a straight-line basis

• Finance leases: Derecognize the asset and recognize a receivable

However, lessors must ensure disclosures provide sufficient information to assess the amount, timing, and uncertainty of lease cash flows.

Impact on Financial Statements

Implementing IFRS 16 affects the following:

• Balance Sheet: Recognition of new assets and liabilities increases reported leverage

• Income Statement: Lease expenses are replaced by depreciation and interest, boosting EBITDA

• Cash Flow Statement: Lease payments move from operating to financing activities

These changes alter key metrics used by analysts and investors, making communication essential. The Accounting Decision-Making and Financial Communication Training Course teaches professionals how to interpret and present these impacts to stakeholders effectively.

Implementation Challenges and Best Practices

Implementing IFRS 16 is not just an accounting exercise—it requires cross-functional coordination, updated systems, and change management. Common challenges include:

• Collecting and analyzing lease contracts

• Determining discount rates and lease terms

• Modifying ERP systems for lease tracking

• Educating stakeholders on the new standard

To streamline implementation:

• Create a centralized lease database

• Use lease accounting software for automation

• Review all contracts for embedded leases

• Train finance, legal, and procurement teams

• Establish a governance framework for ongoing compliance

Real-World Case: Transitioning to IFRS 16

A multinational retail company with hundreds of store leases faced a major compliance challenge during its IFRS 16 transition. After enrolling key staff in the Certificate in Practical Finance and Accounting Training Course, they conducted a full lease inventory, standardized discount rate assumptions, and implemented lease accounting software.

The outcome:

• Achieved full compliance ahead of audit deadlines

• Improved accuracy in budgeting and forecasting

• Enhanced lease cost visibility for decision-making

This example highlights the value of structured training in navigating complex accounting standards.

The Role of Training in IFRS 16 Compliance

As the standard continues to evolve, organizations must keep their finance teams up to date. AZTech’s expert-led training courses are designed to help professionals:

• Understand IFRS 16 principles and technical applications

• Prepare accurate journal entries for leases

• Evaluate lease vs. buy decisions under the new rules

• Analyze the impact on financial metrics and reports

• Build policies and procedures for ongoing compliance

Relevant courses include:

• Accounting, Finance Policies & Procedures Training Course – for internal control design and policy development

• Accounting Decision-Making and Financial Communication Training Course – for financial reporting and strategic communication

• Certificate in Practical Finance and Accounting Training Course – for applied accounting techniques, including lease calculations

Final Thoughts

IFRS 16 has redefined how leases are accounted for, bringing increased visibility and consistency to financial reporting. While the standard presents certain complexities, it also offers an opportunity to improve asset management, enhance transparency, and drive better financial decisions.

By equipping your team with the right knowledge through AZTech’s Finance & Accounting Training Courses, you can ensure full compliance with IFRS 16 and strengthen your organization’s financial integrity.

FAQs:

1. What is IFRS 16?

IFRS 16 is an international accounting standard that requires lessees to recognize most leases on the balance sheet as a right-of-use asset and a lease liability.

2. What assets are excluded under IFRS 16?

Short-term leases (under 12 months) and low-value asset leases can be excluded and treated similarly to operating leases.

3. How does IFRS 16 impact financial statements?

It increases assets and liabilities, shifts lease expenses from operating to financing costs, and affects metrics like EBITDA and leverage ratios.

4. Which training course helps with IFRS lease calculations?

The Certificate in Practical Finance and Accounting Training Course provides hands-on exercises in lease accounting and journal entries.

5. How can I explain IFRS 16 changes to executives?

The Accounting Decision-Making and Financial Communication Training Course helps professionals present IFRS impacts clearly to leadership and stakeholders.

6. What course should I take to design IFRS-compliant accounting policies?

The Accounting, Finance Policies & Procedures Training Course is ideal for building internal frameworks aligned with IFRS standards.