International Standards Guide · Last updated May 2026
IFRS 16 Lease Accounting Guide
What changed, who is affected, and what finance teams and auditors need to know about lease accounting under IFRS 16.
IFRS 16 fundamentally changed how leases appear in financial statements. For lessees, the distinction between operating leases and finance leases was removed. Almost every lease now appears on the balance sheet — creating new assets, new liabilities, and more accounting work.
This guide explains the key requirements, what finance teams need to get right, and what auditors expect to see.
At a glance
| Effective date | 1 January 2019 (mandatory for IFRS reporters) |
| Replaces | IAS 17 Leases |
| Main change | Operating leases move onto the balance sheet as right-of-use assets and lease liabilities |
| Who applies it | Entities preparing financial statements under IFRS |
| UK equivalent | FRS 102 amendments (effective January 2026) — see our FRS 102 guide |
| Main challenge | Lease data, discount rate judgements, ongoing remeasurements, and audit evidence |
| Authority | IFRS Foundation (International Accounting Standards Board) |
UK companies applying FRS 102 follow a separate but closely aligned standard — see our FRS 102 guide.
What changed under IFRS 16?
Before IFRS 16, lessees could keep operating leases off the balance sheet. They were disclosed in the notes but did not appear as assets or liabilities. Finance leases were on the balance sheet, but most leases — particularly property leases — were operating leases.
IFRS 16 removed that distinction. For lessees, almost every lease with a term of more than 12 months now requires recognition of:
- A right-of-use (ROU) asset — representing the right to use the leased asset over the lease term
- A lease liability — representing the obligation to make future lease payments
The practical effect for most businesses was a significant increase in reported assets and liabilities, a change in the shape of P&L charges, and a meaningful improvement in EBITDA.
What changes in practice
Balance sheet
Right-of-use assets and lease liabilities are recognised for most leases. For businesses with large property portfolios or fleet arrangements, this can be material.
EBITDA
EBITDA increases because operating lease costs move below the line. The old rent expense is replaced by depreciation (below EBIT) and interest — both excluded from EBITDA.
P&L — front-loading
In early years, the combined depreciation and interest charge is higher than the old straight-line rent cost. This reverses in later years as interest on the reducing liability falls.
Covenant and ratios
Net debt ratios and leverage metrics are affected by the new lease liabilities. Businesses should review any covenant ratios that reference balance sheet figures.
Audit complexity
Auditors review lease calculations, discount rate judgements, lease term assessments, and the evidence trail. IFRS 16 significantly increased the audit evidence burden for lessees.
Ongoing remeasurement
When a lease is modified, when assumptions change, or when an option is reassessed, the lease liability and ROU asset must be remeasured. This is an ongoing accounting requirement, not a one-time calculation.
Key concepts
Right-of-use asset
The ROU asset is initially measured at the present value of the lease liability, plus any initial direct costs, prepayments, and estimated restoration obligations. It is then depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset.
Lease liability
The lease liability is the present value of future lease payments, discounted at the rate implicit in the lease — or, if that rate cannot be readily determined, at the lessee's incremental borrowing rate. The liability is then unwound over the lease term using the effective interest method, with payments reducing the outstanding balance.
Incremental borrowing rate (IBR)
The IBR is the rate at which the lessee could borrow over the lease term, in the same currency, with similar security and for a similar amount. Determining the IBR requires documented professional judgement. It is one of the most commonly reviewed areas during audit, because it materially affects the lease liability and ROU asset values.
Lease term
The lease term includes the non-cancellable period plus any optional extension periods where the lessee is reasonably certain to exercise them, and any termination options where the lessee is reasonably certain not to exercise them. The assessment of "reasonably certain" is a judgement that must be documented and updated when facts and circumstances change.
Practical exemptions
IFRS 16 permits two expedients that allow lessees to avoid recognising a lease asset and liability:
- Short-term leases: leases with a term of 12 months or less at commencement date. Payments are recognised as an expense on a straight-line basis over the lease term. This is an accounting policy choice by asset class.
- Low-value assets: leases where the underlying asset has a low value when new. The IFRS 16 standard references approximately USD 5,000 as a guide. This exemption applies on a lease-by-lease basis regardless of the lessee's size.
Both exemptions require disclosure. The application of each must be an accounting policy decision applied consistently.
What finance teams need to document
IFRS 16 is judgement-intensive. For each material lease, finance teams should be able to show:
- Lease term determination: which periods are included, and why — particularly where there are renewal options or break clauses
- Discount rate selection: how the IBR was determined, any benchmarks used, and what assumptions were made
- Option assessments: whether renewal, purchase, or termination options are reasonably certain to be exercised, with supporting rationale
- Exemption decisions: which leases qualify as short-term or low-value and why
- Remeasurement triggers: when and why the lease liability was remeasured, and how the adjustment was calculated and recorded
What auditors expect
IFRS 16 is a high-risk area for auditors, particularly because of the judgements involved. Audit teams will typically want to see:
- A complete lease register covering all in-scope arrangements
- Calculation workings for each lease liability and ROU asset that can be traced to source terms
- Documented support for the discount rate used on each lease
- Evidence of lease term assessments, updated when circumstances change
- Amortisation schedules that agree to the balance sheet and income statement
- A full audit trail from journal entries back to the underlying calculations
- Statutory disclosures that are complete and consistent with the ledger
Frequently asked questions
What leases are exempt under IFRS 16?
Short-term leases (12 months or less at commencement) and leases for which the underlying asset is of low value when new may be kept off the balance sheet. The exemptions are accounting policy choices and require disclosure.
How is the lease liability calculated?
The lease liability is the present value of future lease payments over the lease term, discounted at the rate implicit in the lease or — if not readily determinable — the lessee's incremental borrowing rate. The effective interest method is then used to unwind the liability over time.
What is a right-of-use asset?
A right-of-use asset represents the lessee's right to use an underlying asset for the lease term. It is initially measured at the same amount as the lease liability, adjusted for any prepayments, initial direct costs, and restoration obligations. It is then depreciated over the lease term.
Does IFRS 16 increase EBITDA?
Yes, in most cases. Because operating lease costs are replaced by depreciation and interest — neither of which is included in EBITDA — reported EBITDA typically increases. This does not indicate improved profitability; it is a presentation change.
What happens when a lease is modified?
A lease modification triggers a remeasurement of the lease liability and an adjustment to the ROU asset. The new liability is calculated at the revised lease payments discounted at a revised discount rate, and the difference is taken to the ROU asset.
Does IFRS 16 apply to UK companies?
UK listed companies and those applying IFRS apply IFRS 16. UK private companies applying FRS 102 follow a separate but closely aligned standard — the 2026 FRS 102 amendments, which bring UK lease accounting broadly in line with IFRS 16.
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Instead of managing lease workings across spreadsheets and working papers, finance teams can keep all calculations, judgements, and audit evidence together — ready when the auditor asks.
Official references
Related guides
This guide is provided for general informational purposes only and does not constitute accounting, audit or legal advice. You should seek professional advice specific to your circumstances before making any decisions based on this content.