IFRS 16 Leases: Summary, Example, Journal Entries, and Disclosures

by | Feb 6, 2021 | 12 comments

IFRS 16 summary

Companies previously following the lease accounting guidance under IAS 17 likely transitioned to IFRS 16 during their 2019 fiscal year, in accordance with the standard’s effective date of January 1, 2019, for annual reporting periods beginning on or after that date. Therefore, the standard is now effective for all organizations following international accounting standards.

This article will walk through the key changes between the lessee accounting model under IAS 17 and IFRS 16 and also provide a comprehensive example of lessee accounting under IFRS 16. The lessor accounting model under IFRS 16 remains relatively unchanged from IAS 17 and will not be covered in this article.

Note: This article has been updated for the benefit of organizations who have already transitioned to IFRS 16. Click here to read or download the previous version of this article, which includes two transition examples.

IFRS 16 leases

Within the lessee accounting model under IFRS 16, there is no longer a classification distinction between operating and finance leases. Rather, now a single model approach exists whereby all lessee leases post-adoption are reported as finance leases. These leases are capitalized and presented on the balance sheet as both assets, known as the right-of-use (ROU) asset, and liabilities, unless subject to any of the exemptions prescribed by the standard.

Similar to finance lease accounting under IAS 17, the accounting treatment for finance leases under IFRS 16 results in the recognition of both depreciation and interest expense on the income statement. For those entities dually reporting under both IFRS 16 and ASC 842, you will notice that the accounting for finance leases under IFRS 16 resembles the accounting for finance leases under ASC 842. However, ASC 842 still retains the operating lease classification.

In conjunction with the change in the lessee’s financial statement presentation, IFRS 16 also requires more robust disclosures.

What is considered a lease under IFRS 16?

Under IFRS 16, a lease is defined as a contract granting an entity the right to utilize a specific asset for a prescribed period of time in exchange for agreed-upon consideration. To determine whether a contract grants control of the asset to the lessee, the agreement must provide the following to the lessee:

  1. The right to substantially all economic benefits from the use of the asset
  2. The right to dictate how the asset is used by the entity

At times, an organization may have a contract that seems to meet the definition of a lease but does not fall within the scope of IFRS 16. Situations where this may occur include but are not limited to:

  1. Leases of biological assets
  2. Leases for the exploration of non-regenerative resources such as oil, gas, etc.
  3. Service concession arrangements
  4. Licenses of intellectual property

Concurrently, lessees reporting under IFRS 16 may choose to take advantage of practical expedients that exclude certain types of leases from capitalization. These include:

  1. Short-term leases, defined as having a term of 12 months or less at commencement and no option to purchase the leased asset
  2. Leases of low-value assets, defined as leases for which the underlying asset’s fair value (when the asset is new) is generally less than $5,000

Note: Please refer to our blog on practical expedients for more details on IFRS 16 expedients


IFRS 16 finance lease example

Since the majority of entities reporting under IFRS have already adopted IFRS 16, we will bypass a discussion of the various adoption methods and jump right into the accounting. For a breakdown of different adoption methods, please refer to our IFRS 16 detailed walkthrough.

In the example below, we’ll outline the steps to calculate the lessee’s opening lease liability and ROU asset and present the complete amortization schedule, followed by the initial transition journal entry and the journal entry for the first period’s activity.

Commencement Date: January 1, 2021
Lease Term: 10 years
Lease Payment (paid in arrears): $10,000 annually
Lessee’s Incremental Borrowing Rate: 6%
Useful Life of Underlying Asset: 25 years

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Amortization schedule

Based on the facts above, we’ll take the following steps to generate the IFRS 16 amortization schedule:

  1. Calculate the initial lease liability as the present value of the total remaining lease payments as of the commencement date.
  2. Calculate the initial right-of-use asset as the lease liability at commencement plus or minus any necessary adjustments.
  3. Amortize the lease liability over the lease term to reflect both lease payments and interest on the liability using the effective interest method.
  4. Depreciate the ROU asset in a systematic and rational manner over the useful life of the underlying asset or the lease term, whichever is shorter.

Using the values noted above, the amortization schedule at the commencement date of the lease is as follows:

IFRS 16 Lease Amortization ScheduleTo calculate the present value of the future lease payments, apply the lessee’s incremental borrowing rate of 6%. Per IFRS 16, lessees are encouraged to use the rate implicit in their lease. However, if that is not readily determinable, then a lessee is provided further leeway to use their incremental borrowing rate as we have done in this example.

As we can see in the above schedule, because no adjustments were necessary to calculate the opening ROU asset at commencement, the ROU asset is equal to the lease liability. Thereafter the ROU asset is depreciated in a systematic and rational manner (e.g. straight-line in our case) over the lesser of the lease term or useful life of the underlying asset. In our example, the ROU asset is depreciated over the 10-year lease term, which is shorter than the leased asset’s useful life of 25 years.

Journal entries

The initial journal entry under IFRS 16 records the asset and liability on the balance sheet as of the lease commencement date. Below we present the entry recorded as of 1/1/2021 for our example:

Initial Journal EntryUtilizing the amortization table, the journal entry for the end of the first period is as follows:

First Period Journal Entry

IFRS 16 disclosures

Now let’s cover the disclosure requirements for lessees under IFRS 16. Within the notes to the financial statements, an entity is expected to present both qualitative and quantitative disclosures regarding their leasing activities for the respective reporting period(s). The quantitative disclosures required by IFRS 16 for lessees include but are not limited to:

  • The carrying amount of all ROU assets summarized by asset class as of the end of the reporting period
  • ROU asset depreciation expense, summarized by asset class for the reporting period
  • Total interest expense on lease liabilities for the reporting period
  • Expenses from short-term leases not included on the balance sheet as of the end of the reporting period
  • Expenses from low-value asset leases not included on the balance sheet as of the end of the reporting period or in the expense summary of short-term leases for the reporting period
  • Expenses from variable lease payments excluded from the lease liability calculation
  • Sublease income for the reporting period
  • Any gains or losses recognized from sale-leaseback transactions
  • Total cash outflows for leases
  • Any ROU asset additions
  • A maturity analysis of all lease liabilities as of the end of the period

Furthermore, the lessee is required to disclose certain qualitative information to help financial statement users understand the entity’s leases and leasing activities, including the following:

  • Summary of leasing activities
  • Commitments for leases not yet commenced (i.e. a liability is not yet recorded on the balance sheet)

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This concludes our high-level overview of IFRS 16. We introduced the key differences for lessee accounting under IAS 17 and IFRS 16, provided an example of a lessee amortization schedule and the related journal entries, and discussed the required disclosures. Many of the topics presented are further discussed in the articles listed below or linked throughout this article.

More IFRS 16 accounting articles

If you liked this article, be sure to read some of these other pieces covering various aspects of accounting for leases under IFRS 16:

Free Lease Accounting Software


  1. solomon



    How to treat with the termination of a lease under IFRS 16. Rented a vehicle for 48 months @ $1000 per month. IBR 5%

    At the beginning of the 43rd month (IBR 6%) it was agreed to terminate the lease immediately and pay a termination fee of $3,600.

    How do I remove the ROU Asset and Lease Liability from my accounts

    • Kiley Arnold

      Hi! Thanks for the question. This article discusses how to account for terminations under IFRS 16, ASC 842 and GASB 87. Basically, when fully terminating a lease under IFRS 16, both the lease liability and ROU asset are written down to $0 and any variance in their values is recorded to gain or loss on the income statement.

  3. Anjali Negi

    Is advance payment made before the commencement of lease shown as ROU asset even when Entity has not obtained right to use that asset?

    • LeaseQuery

      Thanks for the question Anjali!

      Under ASC 842, multiple things are factored into the opening ROU asset balance, including initial direct costs or prepayments made by the lessee. Any incentives received from the lessor will subtracted from this opening balance. The same is true under IFRS 16. Check out this blog post for more information on how to calculate these balances after transition for operating leases.

  4. Rick

    On the example above, let’s say on Year 3, the Lessee entered into a Sub-lease contract for $7000 per year for the remainder of the lease term.

    Do we “dispose” the portion of the ROU (Debit Accum Deprn Cr ROU) but the Lease Liability remains?

    or do we reduce the lease liability and rou (Dr Lease Liability Cr ROU); not touch accum depreciation?

    Thank you!

    • Kiley Arnold

      Thanks for the question Rick!

      Per ASC 842-20-35-14, The original lessee (as sublessor) shall account for the original lease depending on the sublease type:

      If the sublease is classified as an operating lease (most likely), then the ROU asset and liability associated with the original lease are netted against the sublease income. The original lessee shall continue to account for the original lease as it did before commencement of the sublease. If the lease cost for the term of the sublease exceeds the anticipated sublease income for that same period (as in the example you provided w/ $10,000 of annual lease cost and $7,000 of annual sublease income), this is an indicator carrying amount of the right-of-use asset associated with the original lease may not be recoverable in accordance with paragraph 360-10-35-21.

      We actually have a blog written about sublease accounting as well — check it out here for more info.

  5. MS

    There’s a contact will be ended on 31 December 2023 based on the signed contract and it has been calculated based on this fact but it has been ended on 31 December 2020. What is the entry that should be recorded as the right of use balance doesn’t equal the lease liability balance ? (How to close the right of use account and the lease liability account ?)

    • Kiley Arnold

      Hi! Thanks for the question. This article discusses how to account for terminations under IFRS 16, ASC 842 and GASB 87. Basically, when fully terminating a lease under IFRS 16, both the lease liability and ROU asset are written down to $0 and any variance in their values is recorded to gain or loss on the income statement.

  6. isaac frimpong

    how to treat lease when advance payment are may in the commencement of the contract

    • LeaseQuery

      Thanks for the question Isaac!

      It sounds like you are referring to prepaid rent, which is a lease payment made for a future period. This scenario occurs when a company makes a cash payment, but the rent expense has not yet been incurred so the company has a prepaid asset to record. The primary indicator for prepaid rent is timing.

      Similar to fixed and variable payments, prepaid rent has different accounting implications under each standard. Under ASC 840 prepaid rent is recorded as an asset. However, under ASC 842, prepaid rent is included in the measurement of the ROU asset. Check out this article for more on how to account for prepaid rent and other ASC 842 rent expense topics.

    • Adekunle

      How do I apply IFRS 16 to a rent agreement with a contract term of 12 months


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