IFRS 16 Lease Accounting: What the Standard Means for Businesses

IFRS 16 lease accounting sets out how businesses around the world must recognise, measure and report leased assets and liabilities on their financial statements. For many organisations, IFRS 16 is no longer a one‑off transition exercise but an ongoing compliance and reporting requirement that affects balance sheets, performance metrics and audit scrutiny.

Issued in January 2016 and effective for reporting periods beginning on or after 1 January 2019, IFRS 16 applies to organisations with leased assets across virtually every sector. These can include offices, vehicles, IT equipment, manufacturing machinery, aircraft and construction equipment. Because leasing remains a common form of financing, IFRS 16 leases continue to have a material impact on how businesses report their financial position.

As well as changing lessee accounting, IFRS 16 also sets out updated requirements for lessors, ensuring greater transparency and consistency in lease reporting across global markets.

IFRS and its work 

Before discussing IFRS 16, it’s worth knowing about the body responsible for its creation and worldwide promotion. The International Financial Reporting Standards Foundation is a not-for-profit organisation headquartered in the UK. Its International Accounting Standards Board creates a globally accepted set of accounting and disclosure standards. These International Financial Reporting Standards (IFRS) aim to be a common “language” for the world’s accountants and bookkeepers.  

The extent to which IFRS rules are embraced varies – but there is no doubt they have proven popular. So far, 169 different global jurisdictions have committed to IFRS. The United States has its own accounting standards (called the US Generally Accepted Accounting Principles (US GAAP)), but it pledged in 2002 to remove differences between IFRS and US GAAP in what became known as the Norwalk Agreement.

The leasing project itself was a joint project between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). The resulting project led to the creation of IFRS 16 and its US equivalent – FASB ASC 842. Though the two boards worked closely to achieve full convergence, some divergence over the course of the project did occur and resulted in some differences between IASB and FASB standards.  

How IFRS 16 works in practice 

IFRS 16 introduces a single lessee accounting model, requiring most leases to be recognised on the balance sheet. This approach enables users of financial statements to clearly see the amount, timing and uncertainty of cash flows arising from leased right‑of‑use assets and associated lease liabilities.

Under IFRS 16, lessees must recognise:

• A right‑of‑use (ROU) asset, representing the right to use the leased item
• A lease liability, representing the obligation to make future lease payments

This applies to most leases with a term of longer than 12 months. Certain exemptions are available, including short‑term leases and leases of low‑value assets (generally assets worth less than approximately $5,000 when new). Remember that the definition of a lease under IFRS 16 is also critical for compliance.

Although the core principles of IFRS 16 lease accounting have remained stable since implementation in 2019, additional guidance has been issued. This includes clarifications related to COVID‑19 rent concessions and interbank offered rate (IBOR) reform, both of which continue to affect IFRS 16 compliance and reporting.

The impacts of IFRS 16 on the business balance sheet 

One of the most significant changes introduced by IFRS 16 was the removal of “off‑balance‑sheet” accounting for lessees. Previously, similar lease arrangements could be treated very differently depending on classification tests, with many operating leases excluded from the balance sheet altogether.

IFRS 16 brings greater consistency by requiring most leases to be recognised in full. However, this change also affects key financial metrics such as EBITDA, gearing ratios and return on assets. Understanding how IFRS 16 lease liabilities are calculated and reassessed is essential — particularly for audits and covenant reporting.

As a result, businesses must maintain accurate and auditable lease data and implement robust processes to identify, track and reassess lease arrangements on an ongoing basis.

What IFRS 16 doesn’t affect 

Understanding the distinction between a lease and a service is critical for IFRS 16 compliance. While leases are in scope of the standard, service contracts are not.

In simple terms, a lease typically involves a tangible asset that the customer controls for a defined period in exchange for payment. By contrast, in a service arrangement, control of the asset remains with the supplier.

Some contracts contain both lease and non‑lease components. IFRS 16 allows businesses to separate these elements and account for the lease component independently, or, in some cases, treat the entire contract as a lease depending on practical expedients and materiality considerations.

What types of leases are exempt from IFRS 16? 

Certain types of leases fall outside the scope of IFRS 16 and do not need to be accounted for under the standard. These include:

• Leases to explore for or use minerals, oil, natural gas and other non‑regenerative resources
• Leases of biological assets
• Service concession arrangements
• Licences of intellectual property

Correctly applying these exemptions is an important part of IFRS 16 compliance, particularly for organisations with complex or international lease portfolios.

IFRS 16 reporting requirements

IFRS 16 imposes detailed reporting requirements on lessees. At the commencement of a lease, a business must measure and recognise:

• The total lease liability, based on future lease payments
• Any payments made at or before commencement
• Initial direct costs incurred by the lessee
• Estimated costs for dismantling, removing or restoring the leased asset (where applicable)

Ongoing IFRS 16 reporting also requires businesses to account for depreciation of right‑of‑use assets, interest on lease liabilities, impairment, and reassessments triggered by changes in lease terms, indices or rates used for variable payments.

For UK entities preparing under UK GAAP, it is also important to understand how IFRS 16 compares with FRS 102.

IFRS 16 and lessor accounting

While IFRS 16 replaced IAS 17 for lessors, many aspects of lessor accounting remain unchanged. Lessors continue to classify leases as either operating or finance leases under broadly similar principles.

However, IFRS 16 introduced updated guidance on the classification of subleases and enhanced disclosure requirements. These changes are designed to provide greater transparency around a lessor’s exposure to risk and the nature of its leasing activities.

How IRIS can help with IFRS 16 compliance and reporting

IRIS Innervision is a leading provider of IFRS 16 lease accounting software and lease management services. We help organisations automate IFRS 16 compliance, strengthen controls, and simplify lease reporting across global portfolios.

By combining specialist technology with deep accounting expertise, IRIS supports finance teams in meeting ongoing IFRS 16 reporting obligations with confidence.

Eva Mrazikova

Global Head of Product Marketing

Eva Mrazikova is Global Head of Product Marketing at IRIS, where she leads go-to-market strategy, competitive positioning and product marketing across IRIS’ Accountancy and HCM portfolios in the UK and US.

With more than 20 years’ experience spanning product marketing leadership, commercial strategy and technology transformation, Eva brings a rare blend of strategic vision and hands-on execution to complex, multi-product businesses.

A recognised product marketing leader and qualified accountant, she has spent her career at the forefront of digital transformation, helping organisations navigate the shift from legacy platforms to cloud-based, AI-enabled solutions while driving measurable commercial outcomes through market-led strategy.