IFRS 16 leases explained

Before 2019, most leases of property, aircraft and equipment never appeared on a lessee's balance sheet: they were operating leases, disclosed in a note and expensed as rent. IFRS 16 changed that, adding trillions in assets and liabilities to company balance sheets worldwide. This guide explains what the standard requires and what it does to the numbers.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

IFRS 16 Leases requires a lessee to recognise almost every lease on its balance sheet: a right-of-use asset for the right to use the leased item, and a lease liability for the obligation to pay for it. The only exemptions are optional ones for short-term and low-value leases. Lessors still classify leases as finance or operating. IFRS 16 has applied since 1 January 2019, replacing IAS 17.

At a glance

Applies from
1 January 2019
Replaced
IAS 17
Lessee model
One model: on balance sheet
Exemptions
Short-term and low-value, optional
Lessor model
Finance or operating, unchanged
Excel
Lease calculator
IFRS 16 leases explainedApplies from: 1 January 2019; Replaced: IAS 17; Lessee model: One model: on balance sheet; Exemptions: Short-term and low-value, optional; Lessor model: Finance or operating, unchanged; Excel: Lease calculator.KEY FACTS AT A GLANCEIFRS 16 leases explainedApplies from1 January 2019ReplacedIAS 17Lessee modelOne model: on balancesheetExemptionsShort-term and low-value,optionalLessor modelFinance or operating,unchangedExcelLease calculatorChecked against official sourcesTax BakersIFRS 16 leases explainedApplies from: 1 January 2019; Replaced: IAS 17; Lessee model: One model: on balance sheet; Exemptions: Short-term and low-value, optional; Lessor model: Finance or operating, unchanged; Excel: Lease calculator.KEY FACTS AT A GLANCEIFRS 16 leases explainedApplies from1 January 2019ReplacedIAS 17Lessee modelOne model: on balance sheetExemptionsShort-term and low-value, optionalLessor modelFinance or operating, unchangedExcelLease calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What is a lease under IFRS 16?

A contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Property, vehicles, aircraft, ships, equipment, network capacity and land can all be leased. See the IFRS 16 identification test.

How does a lessee account for a lease?

At the start of the lease the lessee measures the lease liability at the present value of the lease payments not yet paid, and the right-of-use asset at the same amount, adjusted for payments made at or before the start, initial direct costs, incentives received and any restoration costs. Afterwards, the liability accrues interest and is reduced by payments, and the asset is depreciated, usually on a straight-line basis. See lessee accounting step by step.

What does it do to the numbers?

Same lease, different expense patternSame lease, different expense pattern108,237100,000Year 1104,319100,000Year 2100,206100,000Year 395,887100,000Year 491,351100,000Year 5IFRS 16 depreciationIFRS 16 interestStraight-line lease cost
A five-year lease of CU 100,000 a year at 5%: IFRS 16 front-loads the expense; the total is the same.

For a five-year lease of CU 100,000 a year at a 5% discount rate, the lessee recognises a liability and an asset of CU 432,948. The yearly expense is depreciation of CU 86,590 plus interest, so it starts at CU 108,237 and falls to CU 91,351, while total expense over the lease equals the CU 500,000 paid. Under IAS 17, as under US GAAP's operating lease model today, the expense would have been CU 100,000 a year.

MeasureEffect of IFRS 16 compared with an operating lease under IAS 17
Total assets and liabilitiesHigher
EBITDAHigher: rent is replaced by depreciation and interest, both below EBITDA
Operating profitUsually a little higher: interest moves out of operating costs
Profit in early yearsLower, because interest is front-loaded
Cash flow from operating activitiesHigher: lease principal payments are financing cash flows
Total cash paidUnchanged

Are there exemptions?

Two optional ones. A lessee may expense payments on a straight-line basis for short-term leases, with a term of 12 months or less and no purchase option, and for leases of low-value assets, such as laptops and office furniture, assessed on the value of the asset when new. See short-term and low-value exemptions.

What about lessors?

Lessor accounting is largely unchanged from IAS 17. A lessor classifies each lease as a finance lease, if it transfers substantially all the risks and rewards of owning the asset, or an operating lease. Under a finance lease the lessor replaces the asset with a receivable; under an operating lease it keeps the asset and recognises rental income. See lessor accounting.

Which industries are most affected?

IndustryTypical leases
RetailStore premises, often with extension options and turnover-based rent
AirlinesAircraft and engines, often through sale and leaseback
TelecomTower space, rooftop sites, fibre capacity and shops
Shipping and logisticsVessels, containers, warehouses and vehicle fleets
Banking and professional servicesBranches and office space

For a retailer or telecom operator with thousands of sites, the lease liability can be one of the largest items on the balance sheet.

Where does IFRS 16 need judgement?

  • Whether a contract contains a lease, especially for capacity and service contracts.
  • The lease term, when there are extension or termination options.
  • The discount rate, usually the lessee's incremental borrowing rate.
  • Separating lease and non-lease components, such as maintenance in a car lease.
  • Modifications and reassessments when terms change.

How does US GAAP compare?

ASC 842 also puts leases on the balance sheet, but keeps two models for lessees: finance leases, accounted for much like IFRS 16, and operating leases, with a single straight-line cost. See IFRS vs US GAAP: the key differences. The Lease calculator (Excel) shows both side by side.

Need help applying the standards?

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Questions people ask

What is IFRS 16?

The IFRS standard on leases, effective from 1 January 2019, which requires lessees to recognise almost all leases on the balance sheet.

What does a lessee recognise under IFRS 16?

A right-of-use asset and a lease liability, then depreciation of the asset and interest on the liability.

Does IFRS 16 change EBITDA?

Yes. It increases EBITDA because rent is replaced by depreciation and interest.

Does IFRS 16 change lessor accounting?

Very little. Lessors still classify leases as finance or operating.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 16 Leases

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 16IFRS 16 lessee accounting step by stepIFRS 16Is it a lease? The IFRS 16 identification testIFRS 16Lease term, extension and termination options under IFRS 16

More in IFRS 16

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This guide is general information. It is not tax or legal advice for your situation.