IFRS 16 Leases Explained: Full Guide + Free Video & Checklist

Updated: May 2025
IFRS 16 changed lease accounting forever. Lessees now bring almost all leases onto the balance sheet — no more hiding operating lease liabilities in the footnotes.

In this guide, you’ll learn how IFRS 16 works in practice, including main rules, two free video lectures and practical checklist to download and use as your reference.

Jump to section:

1. Free VIDEO lecture: Overview of IFRS 16 Leases
2. Objective of IFRS 16
3. What is a lease under IFRS 16?
4. Accounting for leases by lessees

• 4.1 Initial measurement
• 4.2 Subsequent measurement
• 4.3 Exemptions: Short-term and low-value leases

5. Free VIDEO lecture: Example of lease accounting step by step
6. Accounting for leases by lessors

• 6.1 Classification of leases
• 6.2 Finance lease: Initial measurement
• 6.3 Finance lease: Subsequent measurement
• 6.4 Operating lease

7. Sale & leaseback transactions
8. Presentation and disclosures in line with IFRS 16
9. DOWNLOAD IFRS 16 Practical Checklist
10. Further reading&learning

 
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The objective of the standard IFRS 16 Leases is to specify the rules for recognition, measurement, presentation and disclosure of leases.

But, why is there a new lease standard when we had an older IAS 17 Leases?

The main reason is that under IAS 17, lessees were still able to hide certain liabilities resulting from leases and simply not present them on the face of the financial statements.

I’m talking about operating leases, especially those with non-cancellable terms.

Under the new standard, lessees will need to show all the leases right in their statement of financial position instead of hiding them in the notes to the financial statements.

Note: IFRS 16 applies for the periods starting on or after 1 January 2019 (careful about the comparatives).
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A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration (IFRS16, par.9).

This definition of lease is much broader than under the old IAS 17 and you must assess all your contracts for potential lease elements.

You should carefully look at:

• Can the asset be identified? E.g. is it physically distinct?
• Can the customer decide about the asset’s use?
• Can the customer get the economic benefit from the use of that asset?
• Can the supplier substitute the asset during the period of use?

If the answer to these questions is YES, then it’s probable that your contract contains a lease.

As I wrote in my article about comparison of IFRS 16 and IAS 17, the impact of this new broader definition can be quite big, because some service contracts (with payments recognized directly in profit or loss) can now be considered as lease contracts (with necessity to recognize right-of-use asset and lease liability).

Under IFRS 16, you need to separate lease and non-lease components in the contract.

For example, if you rent a warehouse and rental payments include the fees for cleaning services, then you should separate these payments between the lease payments and service payments and account for these elements separately.

However, lessee can optionally choose not to separate these elements, but account for the whole contract as a lease (this applies for the whole class of assets).
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Warning: Lessees do NOT classify the leases as finance or operating anymore!

No classification!

Instead, lessees account for all the leases in the same way.

At lease commencement, a lessee accounts for two elements:

1. Right-of-use asset Initially, a right-of-use asset is measured in the amount of the lease liability and initial direct costs.Then it is adjusted by the lease payments made before or on commencement date, lease incentives received, and any estimate of dismantling and restoration costs (remember IAS 37).
2. Lease liability The lease liability is in fact all payments not paid at the commencement date discounted to present value using the interest rate implicit in the lease (or incremental borrowing rate if the previous one cannot be set).These payments may include fixed payments, variable payments, payments under residual value guarantees, purchase price if purchase option will be exercised, etc.

Let me outline the journal entries for you:

1. Lessee takes an asset under the lease:

   • Debit Right-of-use asset

   • Credit Lease liability (in the amount of the lease liability)

2. Lessee pays the legal fees for negotiating the contract:

   • Debit Right-of-use asset

   • Credit Suppliers (Bank account, Cash, whatever is applicable)

3. The estimated cost of removal, discounted to present value (lessee will need to remove an asset and restore the site after the end of the lease term):

   • Debit Right-of-use asset

   • Credit Provision for asset removal (under IAS 37)

After commencement date, lessee needs to take care about both elements recognized initially:

1. Right-of-use asset
   Normally, a lessee needs to measure the right-of-use asset using a cost model under IAS 16 Property, Plant and Equipment.It basically means to depreciate the asset over the lease term:

   • Debit Profit or loss – Depreciation charge

   • Credit Accumulated depreciation of right-of-use asset

   However, the lessee can apply also IAS 40 Investment Property (if the right-of –use asset is an investment property and fair value model is applied), or using revaluation model under IAS 16 (if right-of-use asset relates to the class of PPE accounted for by revaluation model).

2. Lease liability
   A lessee needs to recognize an interest on the lease liability:

   • Debit Profit or loss – Interest expense

   • Credit Lease liability

   Also, the lease payments are recognized as a reduction of the lease liability:

   • Debit Lease liability

   • Credit Bank account (cash)

   If there is a change in the lease term, lease payments, discount rate or anything else, then the lease liability must be re-measured to reflect all the changes.

If you got this far in reading this article, maybe you find it overcomplicated, especially for “small” operating leases.

Here’s the good news:

You do NOT need to account for all leases like described above.

IFRS 16 permits two exemptions (IFRS 16, par. 5 and following):

1. Leases with the lease term of 12 months or less with no purchase option (applied to the whole class of assets)
2. Leases where underlying asset has a low value when new (applied on one-by-one basis)

So, if you enter into the contract for the lease of PC, or you rent a car for 4 months, then you don’t need to bother with accounting for the right-of-use asset and the lease liability.

You can simply account for all payments made directly in profit or loss on a straight-line (or other systematic) basis.
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Nothing much changed in accounting for leases by lessors, so I guess you already are familiar with what follows.

Unlike lessees, lessors need to classify the lease first, before they start accounting.

There are 2 types of leases defined in IFRS 16:

1. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
2. An operating lease is a lease other than a finance lease.

IFRS 16 (IFRS 16, par. 63) outlines examples of situations that would normally lead to a lease being classified as a finance lease (and they are almost carbon copy from older IAS 17):

1. The lease transfers ownership of the asset to the lessee by the end of the lease term.
2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date of the option exercisability. It is reasonably certain, at the inception of the lease, that the option will be exercised.
3. The lease term is for the major part of the economic life of the asset even if the title is not transferred.
4. At the inception of the lease the present value of the lease payments amounts to at least substantially all of the fair value of the leased asset.
5. The leased assets are of such a specialized nature that only the lessee can use them without major modifications.

 
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At the commencement of the lease term, lessor should recognize lease receivable in his statement of financial position. The amount of the receivable should be equal to the net investment in the lease.

Net investment in the lease equals to the payments not paid at the commencement date discounted to present value (exactly the same as described in lessee’s accounting) plus the initial direct costs.

The journal entry is as follows:

• Debit Lease receivable

• Credit PPE (underlying asset)

The lessor should recognize:

1. A finance income on the lease receivable:

   • Debit Lease receivable

   • Credit Profit or loss – Finance income

2. A reduction of the lease receivable by the cash received:

   • Debit Bank account (Cash)

   • Credit Lease receivable

Finance income shall be recognized based on a pattern reflecting constant periodic rate of return on the lessor’s net investment in the lease.

IFRS 16 then also specifies accounting for manufacturer or dealer lessors.
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Lessor keeps recognizing the leased asset in his statement of financial position.

Lease income from operating leases shall be recognized as an income on a straight-line basis over the lease term, unless another systematic basis is more appropriate.

Here you can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize an asset in their financial statements (it’s a bit controversial and there were huge debates around).

A sale and leaseback transaction involves the sale of an asset and the leasing the same asset back.

In this situation, a seller becomes a lessee and a buyer becomes a lessor. This is illustrated in the following scheme:

Accounting treatment of sale and leaseback transactions depends on the whether the transfer of an asset is a sale under IFRS 15 Revenue from contracts with customers.

1. If a transfer is a sale:
   • The seller (lessee) accounts for the right-of-use asset at the proportion of the previous carrying amount related to the right-of-use retained. Gain or loss is recognized only to the extend related to the rights transferred. (IFRS 16, par.100)
   • The buyer (lessor) accounts for a purchase of an asset under applicable standards and for the lease under IFRS 16.
2. If a transfer is NOT a sale:
   • The seller (lessee) keeps recognizing transferred asset and accounts for the cash received as for a financial liability under IFRS 9 Financial Instruments.
   • The buyer recognizes a financial asset under IFRS 9 amounting to the cash paid.

 
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Lessees must:

• Present right-of-use assets either separately or within the same line item as similar assets.
• Show lease liabilities separately or as part of other financial liabilities.
• Disclose:
  • Maturity analysis of lease liabilities
  • Expense from short-term and low-value leases
  • Cash outflows for leases
  • Additions and carrying amounts of right-of-use assets
  • Significant judgments (e.g., lease term, discount rate)

Lessors must disclose:

• Risk exposure from residual value guarantees
• Selling profit or loss for manufacturer/dealer lessors
• Income from variable lease payments

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Explore more on IFRS 16: Visit this page to access the full library of all IFRS 16-related articles, videos, and examples published by CPDbox.

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