When it comes to financial reporting, few changes have been as impactful as the introduction of IFRS 16 - Leases. For businesses with property or office space under lease, knowing how to approach accounting for IFRS 16 property leases is critical. This standard has transformed lease accounting from a largely off-balance-sheet exercise into one that directly shapes how assets, liabilities, and cash flows are presented.
Unlike the old IAS 17 standard, which allowed operating leases to remain out of sight, IFRS 16 brings nearly all leases, including property leases, onto the balance sheet. This means companies must now recognise both a right-of-use (ROU) asset and a corresponding lease liability for most property agreements, from head offices and distribution centres to rented retail outlets.
Understanding the steps involved - from identifying whether a contract qualifies under IFRS 16, to calculating the lease liability, and ensuring the correct disclosures - can feel overwhelming. That's why this guide breaks down each part of the process in practical terms.
Tip: This guide focuses on IFRS 16 from a property perspective. For a comprehensive overview of IFRS 16 lease accounting, refer to our Complete Guide to IFRS 16 Lease Accounting.
Determining if IFRS 16 Applies to Your Lease
Before diving into the numbers, the first critical step is determining whether your lease contract falls within the scope of IFRS 16. While that might sound obvious for property leases, it's not always as clear-cut as you'd think - especially when contracts contain bundled services, renewal options and embedded leases.
Embedded leases occur when a contract that's not explicitly labelled as a lease still grants control over a specific asset, like an office unit, within a broader service agreement. IFRS 16 requires these lease components to be identified and accounted for separately, even if bundled with services like cleaning or maintenance.
Lease Contract Definition
According to IFRS 16, a lease exists if a contract "conveys the right to control the use of an identified asset for a period of time in exchange for consideration." In practical terms, if you're leasing a specific building, floor, or office unit and you have the right to direct its use and derive the economic benefits from it - then yes, you're likely within scope.
To help simplify this decision-making process, we recommend asking three key questions:
- Is there an identifiable asset? (e.g. "Unit 5, 3rd Floor, 21 Business Street")
- Do you have the right to control the use of the asset? (Can you decide how and when to use it?)
- Does the lessor retain any substitution rights? (Can they swap the space out for another unit without your approval?)
If the answer to the first two is "yes," and the third is "no," you're almost certainly dealing with an IFRS 16 lease.
How to Calculate Lease Liabilities and ROU Assets in Property Contracts
Once you've confirmed that your property lease falls under IFRS 16, the next step is initial recognition - bringing the lease onto your balance sheet. This means recording two new items: a lease liability, representing your obligation to make lease payments, and a right-of-use (ROU) asset, representing your right to use the property.
Lease Liability
Under IFRS 16, the lease liability is calculated as the present value of future lease payments, discounted using the appropriate rate. For property leases, this often includes:
- Fixed payments (e.g. monthly rent)
- Variable payments linked to an index (e.g. CPI increases)
- Expected payments under residual value guarantees
- Purchase option payments (if reasonably certain to be exercised)
When it comes to the discount rate, IFRS 16 allows you to use either the interest rate implicit in the lease, or the lessee's incremental borrowing rate (IBR). The IBR is far more common to be used, especially in property agreements where the implicit rate is rarely disclosed.
It's important to note that variable lease payments based on revenue or performance metrics (such as turnover rent in retail property leases) are excluded from the lease liability calculation. These amounts are recognised as an expense in the period in which the event or condition that triggers the payment occurs.
Right-of-Use Asset
The ROU asset is initially measured at an amount equal to the lease liability, adjusted for:
- Lease payments made before the commencement date (e.g., prepaid rent)
- Any initial direct costs (e.g. legal fees, broker commissions)
- Lease incentives received (which reduce the asset value)
Once recognised, this asset will be depreciated over the lease term. Keep in mind that in practice, it is very common to assess if there is any indicator of impairment for the ROU Asset.
Accounting Entries Explained: Property Leases Under IFRS 16
Once your lease liability and right-of-use (ROU) asset are calculated, the next step is to reflect these in your accounting records. Under IFRS 16, property lease journal entries follow a consistent pattern - from initial recognition through monthly activity.
Here's a summary of the most common journal entries:
At Commencement:
Dr Right-of-use Asset
Cr Lease Liability
To bring the lease on the balance sheet
Monthly Depreciation:
Dr Depreciation Expense
Cr Accumulated Depreciation - ROU Asset
To reduce the ROU asset over the lease term
Monthly Interest:
Dr Interest Expense
Cr Lease Liability
To accrue interest on the lease liability
When Rent is Paid:
Dr Lease Liability
Cr Bank (or Cash)
To reduce the lease liability with each payment
Special Considerations for Property Leases
Property leases often include CPI-linked escalations, lease term extensions, or mid-term changes in usage, all of which may trigger lease remeasurements. Specifically considering the CPI-linked escalations, the conclusion that IFRS 16 arrived at is the fact that CPI is too hard to predict, especially over long periods - which is why the CPI impact on the payments are ignored at commencement of the lease.
Remeasuring Lease Liabilities: Property Modifications in Practice
In the real world, property leases are rarely static. A business might renew its lease, downsize its office space, or agree to a rent adjustment due to a CPI escalation or renegotiation. Under IFRS 16, these changes often require lease remeasurement or modification accounting.
Failing to remeasure a lease correctly can lead to misstatements, which is why this part of the standard is so crucial.
Common Triggers for Remeasurement or Modification
- Extension or reduction in lease term - Renewing a lease for 3 more years
- Change in expected use of options - Management is now expecting to exercise a purchase or break clause
- Rent change due to CPI or market adjustment - Annual CPI-based rent increase of 6%
- Floor space expansion or reduction - Taking on an extra floor or reducing a part of the property lease
- Change in discount rate (in specific scenarios) - If linked to floating interest rates
How to Recalculate the Lease Liability
Once a triggering event occurs, on that day (the Effective Date):
- Reassess the lease term and lease payments.
- Determine the appropriate discount rate.
- Use the original rate if the change is due to CPI or index adjustments.
- Use an updated Incremental Borrowing Rate if it's a significant contract change (like extending the lease).
- Calculate the new present value of the revised payments.
- Adjust the lease liability accordingly.
- Make a corresponding adjustment to the right-of-use asset.
Journal Entry Scenarios
Lease liability increases:
Dr Right-of-use Asset
Cr Lease Liability
Lease liability decreases (by more than the value of the ROU asset carrying value):
Dr Lease Liability
Cr ROU Asset Cost
Cr Gain on Lease Modification (P&L)
When Can You Skip Capitalising a Property Lease? IFRS 16 Exemptions
While IFRS 16 brings nearly all leases onto the balance sheet, it does allow exemptions for leases that are either short in duration or low in value. These simplified accounting treatments are appealing - but when it comes to property leases, it usually is only applicable for short-term property leases.
Short-Term Lease Exemption
Under IFRS 16, a short-term lease is one that:
- Has a lease term of 12 months or less
- Does not include a purchase option
In practice, this might apply to:
- Temporary office rentals
- Pop-up retail locations
If a lease qualifies, the lessee can 'bypass' balance sheet recognition and instead expense lease payments on a straight-line basis over the lease term.
Disclosure Requirements for IFRS 16 Property Leases
Recognising your property leases on the balance sheet is only part of the story. IFRS 16 also sets out a range of disclosure requirements designed to help users of financial statements understand the nature, timing, and uncertainty of your lease obligations, particularly for long-term property leases.
Key Disclosures for Property Leases
- Breakdown of Lease Liabilities - Maturity analysis showing undiscounted lease payments over time
- ROU Asset Movements - Opening and closing balances, additions, depreciation, impairments, and remeasurements
- Lease Expense Types - Short-term, low-value, and variable lease expenses (if applicable)
- Interest Expense - Amount of interest recognised on lease liabilities
- Practical Expedients Applied - Any exemptions used (e.g. low-value or short-term leases)
- Qualitative Disclosures - Nature of leasing activities, extension/termination options
A Quick Tip
When presenting your lease maturity analysis, group the undiscounted payments into categories like:
- Within 1 year
- 1-2 years
- 2-5 years
- Over 5 years
This gives stakeholders a clear view of future obligations tied to your property footprint.
Financial Statement Impacts of IFRS 16 Property Leases
IFRS 16 not only changes how you record leases - it reshapes your financial statements. For companies with property leases, the effects can be substantial, influencing ratios, KPIs, debt covenants, and even investor perception.
1. Balance Sheet Impact
With IFRS 16, you now record:
- A Right-of-Use (ROU) Asset under non-current assets
- A Lease Liability, split between current and non-current liabilities
This increases both sides of the balance sheet, often inflating total assets and liabilities - especially for long-term leases with significant rent payments.
Effect on Key Ratios:
- Debt-to-Equity - Increases (due to higher liabilities)
- Return on Assets - Decreases (due to a larger asset base)
- Current Ratio - May decrease (as most lease liabilities have a short-term portion)
2. Income Statement Impact
Under IFRS 16, you no longer recognise lease payments as a single "rent" expense. They are now separated into two elements:
- Depreciation on the ROU asset
- Interest expense on the lease liability
This results in front-loaded expenses (higher early on), especially for property leases with long terms. It can also improve EBITDA, since interest and depreciation fall below the EBITDA line.
3. Cash Flow Statement Impact
IFRS 16 reclassifies lease payments:
- Principal repayments go to Financing activities
- Interest portion goes to Operating activities
- Short-term/low-value leases remain in Operating activities
Previously, full rent was classified as an operating cash outflow - so this shift improves operating cash flow, while increasing financing outflows.
Best Practices to Streamline Your Property Lease Workflow
Once you've implemented IFRS 16 for your property leases, the real work begins - ongoing compliance, accuracy, and efficiency. Managing a property lease portfolio under IFRS 16 requires more than just an initial setup; it's about putting in place repeatable, auditable, and scalable processes.
1. Centralise Lease Data and Documentation
Teams often store lease agreements, addendums, CPI clauses, and renewal terms across emails, departments, and hard drives. Centralising these into a single source of truth, ideally within lease accounting software, makes updates, audits, and disclosures significantly easier.
2. Apply Consistent Discount Rates Where Appropriate
IFRS 16 allows you to use portfolio discount rates for similar classes of assets. This reduces complexity and helps maintain consistency, but ensure the grouping is justified and documented.
3. Stay on Top of Modifications and Remeasurements
Property leases are dynamic. Whether it's a change in rental terms, CPI adjustments, or renegotiation of space, these events usually require remeasurement. Having a clear internal process to flag and evaluate changes is essential.
4. Audit-Proof Your Lease Accounting
Make sure every figure is traceable to its source. Auditors review journal entries alongside the supporting details (payment schedules, assumptions, and contracts) to verify accuracy and compliance. This is where spreadsheets often fall short.
5. Use IFRS 16 Software That Fits Your Needs
As your lease portfolio grows, manual tracking becomes a risk. Purpose-built IFRS 16 tools save time, improve accuracy, and generate ready-to-use disclosures.
When selecting software, look for:
- Bulk upload
- Journal entry automation
- Modifications and remeasurements workflows
- Customisable reports and audit logs
Final Thoughts: Navigating Lease Compliance with Confidence
Accounting for property leases under IFRS 16 may seem like a heavy lift, and in many ways, it is. From calculating lease liabilities and managing remeasurements, to disclosing the right information and understanding the financial impacts, this standard demands a structured, detail-oriented approach.
But with the right tools and processes, you can turn lease compliance into a strategic advantage.
Whether you manage a handful of office leases or a complex property portfolio across regions, adopting best practices and the right software allows your finance team to:
- Eliminate manual errors
- Automate monthly journals and remeasurements
- Ensure complete audit readiness
- Generate disclosure-ready reports in minutes
At Rubli, we've helped businesses across industries simplify their IFRS 16 compliance with software designed specifically for lease accounting and support from experts.
