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IFRS 16 leases — practical guide for accountants
Core idea in one paragraph
Most leases put a right-of-use (ROU) asset and a lease liability on the balance sheet. You no longer keep large operating leases completely off-balance-sheet. Each period you recognise interest on the liability and depreciation on the ROU asset (unless a practical expedient or exemption applies).
Measurement — liability
- Discount unpaid lease payments using the interest rate implicit in the lease, if readily determinable; otherwise the incremental borrowing rate.
- Include fixed payments, in-substance fixed payments, and variable payments that depend on an index or rate (using the rate at commencement for initial measure, with later remeasurement rules).
- Exclude payments for non-lease components if you separate them (or use the practical expedient not to separate if elected).
Measurement — ROU asset
- Start from the initial lease liability.
- Add payments made before commencement, initial direct costs, and dismantling/restoration estimates where required.
- Depreciate over the shorter of useful life and lease term (unless ownership transfers or purchase option is reasonably certain).
Month-end checklist
- Update lease register: new contracts, modifications, terminations.
- Post interest (liability) and depreciation (ROU).
- Process payments against liability (and P&L only for elements that are not liability reduction).
- Review index-linked rent changes and remeasure when required.
- Assess short-term and low-value exemptions still valid if used.
- Prepare disclosure support: maturity analysis, depreciation, interest, cash outflow.
For narrative depth, see also the site article on IFRS 16 leases where published under Articles. Always read the full standard and local endorsement status for your reporting framework.
Worked example: initial recognition
A 5-year warehouse lease with fixed annual payments of Rs. 1,200,000, payable in arrears, discounted at an incremental borrowing rate of 9% (since the rate implicit in the lease isn't readily determinable). The lease liability is the present value of those five payments:
| Item | Amount |
|---|---|
| Annual payment | 1,200,000 |
| Discount rate | 9% |
| Present value factor (5 years, annuity, 9%) | 3.890 |
| Initial lease liability | 4,668,000 |
The right-of-use asset starts at the same Rs. 4,668,000 (assuming no payments before commencement, no initial direct costs, and no restoration obligation in this simplified case), then depreciates on a straight-line basis over the 5-year term: Rs. 933,600 per year. Separately, the liability unwinds using the effective interest method — year 1 interest is 9% × 4,668,000 = Rs. 420,120, with the balance of the Rs. 1,200,000 payment (Rs. 779,880) reducing the liability principal. Note the two numbers moving independently: ROU depreciation is straight-line, but interest on the liability is front-loaded and shrinks each year as the balance reduces — a classic exam trap is assuming both follow the same pattern.
Where this sits in the ACCA syllabus
IFRS 16 mechanics (initial and subsequent measurement, exemptions) are tested at Financial Reporting (FR), while Strategic Business Reporting (SBR) pushes further into judgement areas — lease modifications, sale-and-leaseback accounting, and discussing the standard's impact on financial statement analysis and covenant ratios, which examiners increasingly favour over pure computation.