IFRS 16 Audit Procedures: A Practical Checklist

Where the risk sits under IFRS 16

IFRS 16 replaced the operating lease expense with a lease liability and a right-of-use asset for almost every lease. That change moved the audit risk. The numbers now depend on a present value calculation driven by three inputs that each involve estimation or judgement: the payments in scope, the lease term, and the discount rate.

A useful way to plan the section is to treat it as four questions. Is the lease population complete? Are the inputs to each calculation supported? Is the arithmetic right? Are the disclosures complete and consistent with the ledger?

Procedures by assertion

Testing completeness of the lease population

Completeness is the assertion spreadsheet-based lease accounting handles worst, because there is often no single controlled list of leases. Procedures that work in practice:

• Expense scan: interrogate rent, equipment hire, vehicle and IT expense codes for recurring monthly or quarterly payments, and trace each recurring payee to the lease register
• Contract review: review the contract register, legal correspondence and board minutes for new arrangements that convey the right to use an asset
• Embedded leases: enquire about service, logistics and outsourcing contracts that depend on a specific asset; a contract does not need to be called a lease to contain one
• Prior year reconciliation: reconcile this year's register to last year's, and obtain explanations for every addition and removal

Auditing the discount rate

Most lessees cannot readily determine the rate implicit in the lease, so the measurement uses the incremental borrowing rate. It is an estimate, and it is the input auditors challenge most, because a small movement compounds over a long term.

• Obtain the documented rationale for each rate: the base rate, the credit spread, and the adjustments for term, currency and asset security
• Check the rate was set at the right date: commencement for new leases, the modification date for remeasurements, and the date of initial application on transition
• Challenge a single portfolio-wide rate: it is only defensible where lease terms, asset types and start dates genuinely cluster, and that grouping is itself a judgement to document
• Test sensitivity: recompute a material lease at the rate plus and minus a plausible range and consider whether the difference could be material

Challenging lease term judgements

The lease term includes optional periods where the lessee is reasonably certain to extend, and excludes periods after a break the lessee is reasonably certain to exercise. These assessments change the liability directly, so they need evidence, not assertion.

• Obtain the option assessment for each lease with extension, termination or purchase options, and check it considers the economic factors: leasehold improvements, relocation cost, market rents, and the importance of the asset to operations
• Corroborate against behaviour: budgets and forecasts that assume continued use of a site, capital spend on the premises, or public statements about the location
• Check reassessment: a significant event within the entity's control that changes the assessment requires the liability to be remeasured, not just a note for next year

Re-performing the measurement

For a sample of leases, re-perform the calculation from the contract inputs: the present value at the discount rate, the interest unwinding under the effective interest method, and the straight-line depreciation of the right-of-use asset over the shorter of the lease term and the asset's useful life. Our worked lease liability example sets out the mechanics, and the free IFRS 16 lease liability calculator is a quick way to build an independent expectation for a straightforward lease.

Two arithmetic points catch out re-performers. Payments in advance reduce the balance before interest accrues, so the first payment carries no interest. And a schedule that does not close to zero at the end of the term indicates a convention mismatch between the present value and the unwinding, not a rounding difference to be plugged.

Modifications and remeasurements

Modifications are where lease accounting goes wrong most often after day one. For each modification in the period:

• Agree the change to the signed variation or side letter
• Check the classification: a scope increase at a stand-alone price is a separate lease; other changes remeasure the existing liability at a revised discount rate set at the modification date
• For scope decreases, check the proportionate reduction of the right-of-use asset and that the gain or loss went to profit or loss
• Confirm the pre-modification schedule was not restated: the revised measurement applies from the effective date forward

Practical expedients and exemptions

Short-term leases (twelve months or less with no purchase option) and leases of low-value assets can stay off balance sheet and be expensed straight-line. The audit questions are consistency and boundary-testing: is the election applied consistently by class of asset, is the low-value threshold documented and reasonable, and are there twelve-month leases with extension options that fail the short-term test? Check the disclosed expense for exempt leases reconciles to the expense accounts.

Client evidence request list

The section runs faster when the client can produce, up front:

• The lease register, reconciled to the prior year with additions and disposals explained
• Signed contracts, variations and side letters for every lease on the register
• Documented discount rate judgements with the supporting evidence for each component
• Documented option assessments for every lease with extension, break or purchase options
• The calculation workings for each lease: present value, amortisation schedule and depreciation schedule, including remeasurements
• Journal entries for the period, traceable line by line to the calculations
• The disclosure workings: maturity analysis, interest expense, depreciation by class, short-term and low-value expense, and total cash outflow for leases

Our audit evidence checklist covers the preparer's side of this list in more detail.

Common misstatements

• Missing leases: usually vehicles, IT equipment and embedded leases in service contracts
• One discount rate for everything: a portfolio rate applied to leases with very different terms and asset types
• Options ignored: five-year liabilities for sites the business plainly intends to occupy for fifteen
• Escalations missed: fixed uplifts and index-linked increases left out of the payment schedule
• Modifications patched: the spreadsheet edited in place with no revised rate and no derecognition entry, leaving a schedule that no longer ties to anything
• Disclosure drift: a maturity analysis built from a different version of the schedule than the ledger balances

FRS 102 from 2026

UK private companies applying FRS 102 bring leases on balance sheet for periods beginning on or after 1 January 2026, under a model that follows IFRS 16 closely. The procedures above carry across, with one transition-specific addition: the opening balance is measured under the modified retrospective approach, with the remaining payments discounted at the rate at the date of initial application. Our FRS 102 transition guide covers what to test in a first-year file.

Frequently asked questions

This guide is for general information only. Audit procedures should be designed for the specific engagement under the applicable auditing standards.