IFRS 16 might sound like another technical accounting standard, but for many businesses, it’s a fundamental shift in how leases are viewed on the balance sheet — and how decision-makers interpret their company’s financial position.
Whether you lease office space, vehicles, machinery, or IT equipment, IFRS 16 has likely changed the way you report and analyse your contracts. This blog aims to break it down simply — no jargon, just clarity.
What Is IFRS 16 — and Why Did It Change Everything?
Before 2019, leases were mostly split into two camps: finance leases and operating leases, each treated differently in financial statements. This often meant that large leasing commitments never appeared on the balance sheet — which made it tough for investors or lenders to assess a company’s actual liabilities.
IFRS 16 was introduced to solve this. It’s a lease accounting standard issued by the International Accounting Standards Board (IASB) that requires lessees to recognize nearly all leases on their balance sheets. That means every qualifying lease becomes visible as both:
- A right-of-use asset (what you’re using), and
- A lease liability (what you owe for using it)
It’s about visibility, consistency, and aligning financial reporting with economic reality.
The Core Idea Behind IFRS 16
Think of IFRS 16 as a shift in mindset. Instead of seeing leases as off-balance sheet expenses, the standard treats them more like borrowed assets — because, in most cases, that’s what they are.
So, if your company is leasing:
- A fleet of delivery vans
- Warehouse space
- High-end tech equipment
…you’re essentially borrowing the right to use those assets in exchange for payments. IFRS 16 simply puts those obligations and benefits in plain view.
Who’s Affected?
If your business prepares financial statements using International Financial Reporting Standards (IFRS) and has lease agreements longer than 12 months or of significant value — you’re affected.
The standard is primarily focused on lessees (the party using the asset), not lessors (the party providing it). So even if you don’t own much, but you lease a lot, IFRS 16 likely changed how your financials look.
What’s Different in Practice?
Here’s what implementing IFRS 16 changes:
✅ On Your Balance Sheet:
- You’ll now show a right-of-use asset: the value of the leased item.
- You’ll also show a lease liability: the present value of future lease payments.
✅ On Your Profit & Loss Statement:
- Lease payments get split into:
- Depreciation (on the asset)
- Interest expense (on the liability)
This often results in front-loaded expenses, meaning total costs appear higher at the start of a lease.
✅ On Your Ratios:
- EBITDA goes up, because lease payments move below the EBITDA line.
- Debt ratios may increase, since more liabilities are now reported.
- Asset turnover may decline, due to the newly recognized assets.
Exemptions: What Doesn’t Go On the Balance Sheet?
IFRS 16 allows for practical expedients in two cases:
- Short-term leases (12 months or less, with no purchase option)
- Low-value assets (think small-ticket items like laptops or office chairs)
You can still expense these straight to your income statement.
Common Challenges (And How to Tackle Them)
Transitioning to IFRS 16 isn’t just about updating spreadsheets. It’s often a cross-departmental project. Here’s where many businesses struggle:
| Challenge | How to Address It |
|---|---|
| Finding all lease contracts | Conduct a thorough contract audit — finance, legal, and operations should all be involved |
| Calculating the right discount rate | Work with your finance team or advisors to determine the correct incremental borrowing rate |
| System limitations | Consider dedicated lease accounting software that automates calculations and reporting |
| Training | Make sure your finance and audit teams understand the new processes |
Why It Matters Beyond Compliance
IFRS 16 isn’t just about ticking an accounting box. It gives stakeholders a clearer view of your long-term obligations and helps businesses:
- Improve capital allocation decisions
- Understand true costs of leasing vs. buying
- Gain better visibility over contract lifecycles
It also means your financial statements now reflect your real leverage — which can impact banking covenants, investor perceptions, and strategic planning.
