Question 1

How is the lease liability measured under IFRS 16?

Accepted Answer

At commencement, the lease liability is measured at the present value of lease payments not yet paid. Those payments comprise fixed and in-substance fixed payments, variable payments that depend on an index or rate, amounts expected to be payable under residual value guarantees, the exercise price of a purchase option where exercise is reasonably certain, and termination penalties where the lease term reflects early termination. The discount rate is the rate implicit in the lease, or the lessee's incremental borrowing rate where that rate cannot be readily determined. The liability is subsequently increased for interest, reduced for payments made, and remeasured on reassessment or modification.

Question 2

How is the right-of-use asset measured under IFRS 16?

Accepted Answer

The right-of-use asset is initially measured at cost, comprising the initial lease liability, lease payments made at or before commencement less any incentives received, initial direct costs, and an estimate of restoration or dismantling costs. It is subsequently carried under the cost model and depreciated over the shorter of the lease term and the asset's useful life, unless ownership transfers or a purchase option is reasonably certain to be exercised, in which case depreciation runs over the useful life. Impairment is assessed under IAS 36.

Question 3

How is the incremental borrowing rate determined?

Accepted Answer

The incremental borrowing rate is the rate a lessee would pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value in a similar economic environment. Because the rate implicit in the lease is rarely determinable by lessees, the IBR is used in most cases. Common approaches build the rate from observable secured borrowing rates adjusted for lease term and currency, or from a risk-free rate plus a credit spread, with adjustments where a subsidiary borrows on the strength of a parent. Rate determination is among the most frequently challenged judgements in IFRS 16 application.

Question 4

How does IFRS 16 treat lease modifications?

Accepted Answer

A modification is a change in the scope of a lease or its consideration that was not part of the original terms. It is accounted for as a separate lease only where it adds the right to use one or more additional assets and the consideration increases commensurately with the standalone price. Otherwise, where the scope decreases, the lessee reduces the right-of-use asset and recognises a gain or loss on the portion terminated. For all other modifications, the liability is remeasured using a revised discount rate with a corresponding adjustment to the right-of-use asset. Partial terminations, extensions and scope changes are worked through with full journal entries.

Question 5

How does IFRS 16 treat sale and leaseback transactions?

Accepted Answer

The seller-lessee first assesses whether the transfer qualifies as a sale under IFRS 15. If it does, the right-of-use asset arising from the leaseback is measured at the proportion of the previous carrying amount relating to the right of use retained, and only the gain or loss on the rights transferred to the buyer-lessor is recognised. If the transfer is not a sale, the asset continues to be recognised and a financial liability is raised. The Lease Liability in a Sale and Leaseback amendments, effective from 1 January 2024, address subsequent measurement so that no gain is recognised on the retained right of use.

Question 6

What are the short-term lease and low-value asset exemptions?

Accepted Answer

IFRS 16 permits lessees to exclude two categories from balance sheet recognition. The short-term exemption applies to leases with a term of twelve months or less at commencement, taking account of renewal options, and is elected by class of underlying asset. The low-value exemption applies to leases of assets of low value when new, such as tablets, small office furniture and telephones, and is elected lease by lease. Payments on exempt leases are recognised as an expense on a straight-line or other systematic basis.

Question 7

How does lessor accounting work under IFRS 16?

Accepted Answer

Lessor accounting retains the dual model carried over from IAS 17. A lease is classified as a finance lease where it transfers substantially all the risks and rewards incidental to ownership, indicated by transfer of ownership, a purchase option reasonably certain of exercise, a lease term covering the major part of the asset's economic life, present value of payments amounting to substantially all of fair value, or a specialised asset. Finance lessors derecognise the asset and recognise a net investment in the lease. Operating lessors retain the asset and recognise income on a systematic basis. Intermediate lessors in sublease arrangements are covered separately.

Question 8

How do IFRS 16, ASC 842 and FRS 102 Section 20 compare?

Accepted Answer

IFRS 16 applies a single lessee model bringing most leases onto the balance sheet. ASC 842 under US GAAP retains a dual classification for lessees, distinguishing finance from operating leases and producing a different expense profile even though both are recognised on balance sheet. The revised FRS 102 Section 20, effective for periods beginning 1 January 2026, aligns UK and Ireland GAAP much more closely with IFRS 16 by removing the operating and finance lease distinction for lessees, while retaining simplifications such as the obtainable borrowing rate. Teams reporting across frameworks need to understand where the models diverge.

Question 9

Where do the IFRS 16 courses run, and is in-house delivery available?

Accepted Answer

The 2-day programme runs in London, Zurich, Dubai, Doha, Cape Town, Singapore, Sydney, Toronto, Miami, Bermuda, Lima and Rio de Janeiro, with a live online edition available worldwide. Bespoke in-house delivery can be built around an organisation's own lease portfolio, whether property, equipment, vehicles or technology, and its reporting framework. A 15% group discount applies for bookings of five or more participants.

Professional Training Courses

IFRS 16 Leases Workshop (2-Day) | ASC 842 | FRS 102

IFRS 16 Leases Training | Right-of-Use Assets | Lease Liabilities | Discount Rates | Sale-and-Leaseback | ASC 842

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