The 5 Most Common IFRS 16 Mistakes and How to Fix Them

IFRS 16 has been live since January 2019. By now, most finance teams have moved well past transition and settled into steady-state lease accounting. Yet the same mistakes keep appearing, year after year, across organisations of every size. Some are technical accounting errors. Others are process failures that allow problems to accumulate quietly until an auditor or a reporting deadline forces the issue.

This article covers the five most common IFRS 16 mistakes we see in practice and explains how to fix each one. These are not edge cases or obscure interpretations. They are everyday errors that affect lease liability accuracy, disclosure completeness, and audit outcomes.

Mistake 1: Missing Embedded Leases

The Mistake

Most teams are good at identifying contracts that are clearly structured as leases, such as office space, vehicle fleets, or equipment rentals, where it is obvious that an asset is being used for a defined period in exchange for payment. Where things tend to go wrong is with contracts that contain a lease, but are not explicitly labelled as one.

Embedded leases often hide in plain sight within a wide range of everyday commercial arrangements. Common examples include:

• Outsourcing contracts that include the use of dedicated equipment owned by the service provider
• Managed office or co-working agreements that provide exclusive use of specific floors or suites
• IT hosting arrangements where the customer uses dedicated servers or infrastructure, rather than shared capacity
• Logistics contracts that assign specific vehicles, containers, or warehouse space to the customer

If a contract grants the right to use an identified asset for a period of time in exchange for consideration, it constitutes a lease, regardless of its name. Many organisations miss these because their contract review process only looks at documents labelled "lease".

The Fix

Review all significant service contracts against IFRS 16's "identified asset" criteria. The key questions are: is there a specific asset? Does the customer control its use? Does the supplier have a substantive right to substitute the asset throughout the period of use?

• Involve the procurement and legal teams early. These teams negotiate and sign the contracts. They need to understand what triggers a lease under IFRS 16 so they can flag potential embedded leases before they are executed.
• Create a contract review checklist. A short, practical checklist that non-accountants can use when reviewing service contracts prevents embedded leases from slipping through.
• Review existing contracts. If you have not already done a sweep of your current service agreements, do one. Focus on IT, outsourcing, logistics, and facilities management contracts first.

For a full walkthrough of lease identification criteria, see our Complete IFRS 16 Guide.

Mistake 2: Using a Single Discount Rate for Everything

The Mistake

This one is understandable. Determining the incremental borrowing rate (IBR) for every individual lease is time-consuming, so many teams take a shortcut: they pick a single rate and apply it across the portfolio of leases. Erroneously, the same rate is applied to a 3-year equipment lease in GBP and a 10-year property lease in USD, or to both a parent company and a subsidiary operating in a different jurisdiction with a different credit profile.

It is convenient, but difficult to justify. The IBR is intended to reflect what it would cost that specific entity to borrow, for that specific term, in that specific currency, secured against a similar asset. A single rate cannot capture all of those variables. Auditors are well aware of this and will challenge it.

The Fix

Build a rate matrix. You do not need a unique IBR for every single lease, but you do need to differentiate meaningfully.

• At a minimum, differentiate by currency and term band. A 3-year GBP lease and a 10-year EUR lease should not use the same rate. Group leases into term bands (e.g., 1-3 years, 3-7 years, 7+ years) and set rates by currency and band.
• Consider subsidiary credit profiles. If your group includes entities with materially different credit risk, the IBR should reflect the borrowing entity rather than the parent company.
• Document the methodology. Write down how you determine your IBRs, what data sources you use, and how you handle adjustments for collateral, term, and credit risk. This documentation is what auditors will ask for.

For detailed guidance on building a defensible IBR methodology, see our Discount Rates guide.

Mistake 3: Not Reassessing Lease Terms When Circumstances Change

The Mistake

At commencement, teams assess whether extension or termination options are reasonably certain to be exercised. These assessments are documented, the lease term is set, and then often left unchanged. Years pass, even as the underlying circumstances shift significantly.

For example, a company may invest heavily in leasehold improvements in a property where the extension option was initially excluded. A site once considered non-strategic may become a regional headquarters. A fleet of vehicles on 3-year leases with 2-year extension options may be consistently retained, yet the lease term continues to reflect only the original 3 years.

Under IFRS 16, lease terms must be reassessed when there is a significant event or change in circumstances within the lessee's control that affects whether an option is reasonably certain to be exercised. Ignoring this requirement means lease liabilities and right-of-use assets are misstated.

The Fix

• Establish reassessment triggers. Define specific events that require a lease term review, such as approaching option exercise dates, significant capital expenditure on leased assets, changes in business strategy or asset usage, and organisational restructuring.
• Review material leases at least annually. For your most significant leases (typically property leases), incorporate lease reassessment into your year-end close process. Ask business unit leaders whether anything has changed that affects the likelihood of exercising options.
• Track leasehold improvements. Significant unamortised improvements are a strong indicator that an extension option will be exercised. If the remaining useful life of those improvements extends beyond the current lease term, this is a clear trigger for reassessment.

Mistake 4: Treating Rent Reviews as Modifications Instead of Remeasurements

The Mistake

Lease modifications and remeasurements look similar on the surface. Both result in a change to the lease liability; however, the accounting treatments differ, and confusing the two can lead to errors in the discount rate used, the ROU asset adjustment, and potentially the P&L impact.

The most common confusion involves rent reviews. A CPI-linked annual rent increase kicks in, and the team treats it as a modification, using a revised discount rate. Or a negotiated lease amendment is treated as a remeasurement, using the original rate. Both are wrong.

Here is the distinction:

• A remeasurement occurs when existing contractual terms play out as originally anticipated. CPI-linked rent reviews, changes in the assessment of whether an option will be exercised, or changes in amounts expected to be payable under residual value guarantees. For index-linked changes, the original discount rate applies.
• A modification occurs when the parties agree to change the scope or consideration of the lease beyond what was in the original contract. Adding space, extending the term beyond the original options, or negotiating a rent reduction. A revised discount rate applies.

The Fix

• Document a clear decision tree. The key question is straightforward: was this change part of the original contract terms, or is it a new agreement between the parties? If the original contract specified CPI-linked increases, those increases are remeasurements. If the landlord and tenant have negotiated a new rent because the market has moved, that is a modification.
• Train the team on the distinction. This is one of the most commonly misunderstood areas of IFRS 16. A short training session with clear examples can prevent repeated errors.
• Flag rent review dates in your lease register. Knowing when reviews are coming allows you to prepare the correct accounting treatment in advance rather than scrambling at period end.

For the technical details, see our guides on remeasurement and modifications and terminations.

Mistake 5: Incomplete Disclosures

The Mistake

Teams invest significant effort in getting the balance sheet numbers right. The ROU asset is correctly measured, the lease liability is accurately calculated, and the journal entries tie out. Then disclosures are often treated as an afterthought.

IFRS 16 has extensive disclosure requirements, and common gaps include:

• Variable lease expense. Payments not included in the lease liability (e.g., turnover rent, usage-based charges) must be disclosed separately. Many teams omit these entirely.
• Maturity analysis. The standard requires undiscounted future lease payments to be disclosed in specified time bands. Incomplete or incorrectly formatted maturity analyses are a frequent audit finding.
• Short-term and low-value lease expense. If you have elected the practical expedients for short-term or low-value leases, the total expense recognised for those leases must be disclosed.
• ROU asset additions. New right-of-use assets recognised during the period must be disclosed, not just the closing balance.
• Judgements and estimates. Material judgments (such as lease term assessments for significant leases) and estimation uncertainty (such as IBR sensitivity) must be disclosed.

The Fix

• Use a disclosure checklist every reporting period. Do not rely on memory or last year's notes. IFRS 16 disclosure requirements are detailed enough that a checklist is the only reliable way to ensure completeness.
• Prepare disclosures alongside the calculations. If you generate your disclosures from the same data and at the same time as your balance sheet figures, gaps are much easier to spot. Retrofitting disclosures weeks after the close invites omissions.
• Review against peer company disclosures. Look at how comparable companies present their IFRS 16 disclosures. This often highlights items you may have overlooked and provides useful formatting benchmarks.

For a complete list of what IFRS 16 requires in the notes, see our Disclosure Requirements guide.

Getting It Right Going Forward

These five mistakes are preventable. None of them require deep technical expertise to avoid. Most come down to process gaps: contracts that do not get reviewed, rates that do not get updated, assessments that do not get revisited, and disclosures that do not get checked.

A systematic approach to lease identification, documented policies for rates and lease terms, clear decision trees for modifications versus remeasurements, and a disclosure checklist for every reporting period can eliminate most issues before they reach the auditor.

If your team is spending more time fixing IFRS 16 errors than preventing them, it is worth stepping back and asking whether the issue lies with the process rather than the people.