As a result, nearly all leases must now be recognized as a right-of-use (ROU) asset and a corresponding lease liability, dramatically impacting financial statements, key performance metrics, and business operations.
This change has brought greater transparency and comparability to financial reporting, particularly in industries where leasing is a significant part of the business model. However, implementing IFRS 16 is far from a plug-and-play exercise.
It requires a thorough reassessment of lease portfolios, changes to systems and processes, and alignment across finance, legal, procurement, and operations teams. Many companies turn to external IFRS services to navigate the complex transition and ensure a compliant and efficient implementation.
Key Changes Under IFRS 16
Under the previous IAS 17, leases were classified as either finance or operating leases. Finance leases appeared on the balance sheet, while operating leases were kept off the books and expensed as incurred. IFRS 16 eliminates this distinction for lessees, bringing nearly all leases onto the balance sheet.
The new standard requires lessees to recognize:
- A right-of-use asset, representing their right to use the leased asset over the lease term.
- A lease liability, reflecting the present value of future lease payments.
This shift results in increased total assets and liabilities for lessees, impacting financial ratios such as debt-to-equity, return on assets (ROA), and EBITDA. While this improves transparency for investors and stakeholders, it also brings challenges for corporate finance teams accustomed to off-balance sheet lease accounting.
Data Collection and Lease Inventory
One of the most challenging aspects of IFRS 16 implementation is gathering and validating data across the organization’s lease portfolio. Many companies have decentralized lease management practices, with contracts scattered across departments or geographies. Without a centralized lease database, identifying all applicable leases and extracting the required data points—such as lease term, payment schedules, and extension options—can be labor-intensive.
To address this, companies must conduct a comprehensive lease inventory and standardize contract data. In many cases, this involves digitizing lease agreements, implementing lease management software, and developing cross-functional workflows to capture and maintain accurate lease data moving forward.
Judgment and Estimation
IFRS 16 introduces new areas of judgment that require careful documentation and oversight. Companies must determine the lease term, including whether to include optional renewal or termination periods based on the likelihood of exercise. Estimating the discount rate to apply to future lease payments also requires a consistent and supportable methodology.
These judgments can significantly affect the resulting lease liability and right-of-use asset values. Inconsistent assumptions across entities or lease types can lead to misstatements and undermine comparability. Developing robust policies and controls around these judgments is essential to ensure accuracy and audit readiness.
System and Process Changes
To manage the ongoing accounting and disclosure requirements of IFRS 16, companies often need to upgrade or integrate new software solutions. Legacy ERP systems may lack the functionality to track lease-specific data, calculate amortization and interest expenses, or produce required disclosures.
Implementing IFRS 16-compliant lease accounting software helps automate calculations, generate journal entries, and streamline reporting. However, system integration must be handled with care to ensure alignment with existing finance processes and internal controls. Training and change management are also crucial, as finance and accounting teams adapt to new workflows and reporting requirements.
Impact on Financial Metrics and Decision-Making
With leases now appearing on the balance sheet, companies are seeing notable changes in their financial statements. EBITDA generally increases, as operating lease expenses are replaced with depreciation and interest, but debt-related ratios may deteriorate due to higher liabilities.
This shift influences not only how performance is viewed externally but also how internal decisions are made. Lease vs. buy decisions, contract negotiations, and performance-based compensation plans may need to be revisited in light of the new accounting treatment.
Disclosures and Communication
IFRS 16 introduces expanded disclosure requirements, including detailed reconciliations, maturity analyses, and qualitative descriptions of leasing activities. Transparency is critical—not just for compliance, but also for maintaining investor confidence.
Boards and audit committees play a key role in overseeing disclosures, ensuring they are clear, consistent, and aligned with business realities. Investor relations teams should also be equipped to explain changes in financial metrics to analysts and shareholders, helping them understand the impacts of IFRS 16 and the company's strategic leasing decisions.
Risk Management Considerations
Beyond accounting compliance, IFRS 16 can have broader implications for an organization’s risk profile. The increased visibility of lease liabilities may prompt a reassessment of financial covenants, credit ratings, or funding strategies. Additionally, managing lease portfolios at scale introduces operational and compliance risks.
Engaging advisors with financial risk advisory expertise can help companies assess how IFRS 16 affects their overall financial risk exposure. These experts can support scenario modeling, evaluate impacts on capital structure, and help develop leasing strategies that balance financial flexibility with compliance requirements.
Post-Implementation and Continuous Improvement
IFRS 16 implementation does not end with the first compliant reporting period. Companies must establish ongoing processes to manage lease additions, modifications, and terminations. Regular reconciliations, internal audits, and system updates help maintain compliance and identify opportunities for optimization.
Many organizations use the transition to IFRS 16 as a catalyst to improve lease administration, renegotiate terms, and centralize lease management. These strategic improvements can yield cost savings, improve governance, and enhance operational agility in the long run.
IFRS 16 represents a significant evolution in lease accounting, with far-reaching implications for financial reporting, operational processes, and corporate strategy. Its successful implementation requires more than technical accounting adjustments—it demands cross-functional collaboration, robust data management, and long-term process changes.
By investing in the right tools, partnering with experienced IFRS services providers, and incorporating financial risk advisory insights, companies can turn IFRS 16 compliance into an opportunity for greater transparency, efficiency, and strategic advantage in the new era of lease accounting.
Related Resources:
Building an Effective IFRS Implementation Team: Roles and Responsibilities
IFRS Implementation Case Studies: Learning from Success and Failure
The Board's Role in Overseeing Successful IFRS Implementation
IFRS Implementation for Public vs. Private Companies: Different Approaches
System Integration Challenges During IFRS Implementation