Store leases under IFRS 16

Leases are a retailer's biggest commitment after its staff, and IFRS 16 turned them into its biggest liability. Small judgements on each store add up across a store estate. This guide works through a store lease with a break clause and turnover rent, and covers incentives, dilapidations and store closures.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Retail store leases under IFRS 16 put every store on the balance sheet as a lease liability and a right-of-use asset. The key judgements are the lease term, especially whether break clauses will be exercised; turnover rent, which is a variable payment excluded from the liability unless it is in-substance fixed; lease incentives such as rent-free periods; and restoration obligations. In this guide's example, a store with rent of 100,000 a year has a lease liability of 736,009 if the retailer expects to stay ten years, but only 421,236 if it expects to use a break clause after five.

At a glance

Each store
Lease liability and right-of-use asset
Lease term
Reasonably certain renewals and breaks
Turnover rent
Variable: expensed, not in the liability
Rent-free periods
Reduce the right-of-use asset
Dilapidations
In the right-of-use asset, with a provision
Store closure
Impairment of the right-of-use asset
Store leases under IFRS 16Each store: Lease liability and right-of-use asset; Lease term: Reasonably certain renewals and breaks; Turnover rent: Variable: expensed, not in the liability; Rent-free periods: Reduce the right-of-use asset; Dilapidations: In the right-of-use asset, with a provision; Store closure: Impairment of the right-of-use asset.KEY FACTS AT A GLANCEStore leases under IFRS 16Each storeLease liability andright-of-use assetLease termReasonably certainrenewals and breaksTurnover rentVariable: expensed, notin the liabilityRent-free periodsReduce the right-of-useassetDilapidationsIn the right-of-useasset, with a provisionStore closureImpairment of theright-of-use assetTax BakersStore leases under IFRS 16Each store: Lease liability and right-of-use asset; Lease term: Reasonably certain renewals and breaks; Turnover rent: Variable: expensed, not in the liability; Rent-free periods: Reduce the right-of-use asset; Dilapidations: In the right-of-use asset, with a provision; Store closure: Impairment of the right-of-use asset.KEY FACTS AT A GLANCEStore leases under IFRS 16Each storeLease liability and right-of-use assetLease termReasonably certain renewals and breaksTurnover rentVariable: expensed, not in the liabilityRent-free periodsReduce the right-of-use assetDilapidationsIn the right-of-use asset, with a provisionStore closureImpairment of the right-of-use assetTax Bakers
Key facts at a glance, as set out in this guide.

Retail store leases: a worked example

A retailer leases a store for ten years at 100,000 a year, with a break clause allowing it to leave after five years with six months' notice and no penalty. It also pays turnover rent of 3% of sales above 2 million a year. Its incremental borrowing rate is 6%.

Lease term: 10 yearsLease term: 5 years
Lease liability at commencement736,009421,236
Across 300 similar stores220.8 million126.4 million
Turnover rentExpensed as sales occur; not in the liability
Lease liability for one storeLease liability for one store421,2365-year term736,00910-year termLease liability
The break clause judgement changes the liability by almost three quarters.

Which term applies depends on whether the retailer is reasonably certain not to exercise the break. A flagship store recently refitted at great cost, in a strong location, points to ten years; a store in a declining high street, with a short history of profits, points to five. The judgement is made at commencement and revisited only on a significant event within the retailer's control, such as a major refit.

How is turnover rent treated?

Rent linked to sales is one of the variable lease payments that do not depend on an index or rate, so it is excluded from the lease liability and expensed as the sales occur. If the variable rent has a guaranteed minimum, that minimum is an in-substance fixed payment and is included. Retailers with high turnover rent therefore show smaller lease liabilities and higher operating costs than those on fixed rent.

How are lease incentives treated?

Rent-free periods and cash contributions from landlords towards a fit-out reduce the right-of-use asset at commencement. A rent-free first year means the liability reflects only the payments actually due, and the benefit is spread through lower depreciation over the lease term.

What about dilapidations?

Most store leases require the tenant to return the store in its original condition. The estimated cost of restoring the premises is included in the right-of-use asset at commencement, with a provision under IAS 37 for the obligation as it arises. Restoring alterations made later, such as a new shopfront, is added when the alteration is made.

What happens when a store closes?

There is no onerous lease provision for the rent itself under IFRS 16; instead, the right-of-use asset is tested for impairment, and if the store is closed and the lease cannot be exited, its value in use may be close to nil. Costs that are not part of the lease, such as service charges and business rates on an empty store, may require an onerous contract provision. Exiting a lease early through a surrender payment is a lease modification. See lease modifications.

How do retailers manage hundreds of store leases?

With lease management systems that hold each lease's dates, options, payments and incentives, and policies by store type for judgements such as break clauses, applied consistently and reviewed when trading changes.

What about rent concessions and renegotiations?

Rent reductions agreed with landlords are lease modifications, remeasuring the liability at a revised discount rate, unless they are covered by a specific practical expedient; the expedient introduced during the pandemic applied only to payments due up to 30 June 2022. See retail accounting, the IFRS 16 lease term and value in use.

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Questions people ask

How do retailers account for store leases under IFRS 16?

Each store lease is a lease liability and right-of-use asset, with the lease term reflecting renewal and break options the retailer is reasonably certain to exercise or not exercise.

Is turnover rent included in the lease liability?

No. Rent linked to sales is a variable payment, expensed as sales occur, unless it includes an in-substance fixed minimum.

How are rent-free periods treated under IFRS 16?

As lease incentives that reduce the right-of-use asset at commencement.

How is a store closure reflected under IFRS 16?

Through impairment of the right-of-use asset, with onerous contract provisions only for non-lease costs such as service charges.

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.

RetailRetail accounting: the key IFRS issuesIFRS 16Lease term, extension and termination options under IFRS 16IFRS 16Lease modifications under IFRS 16

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