IFRS 16 Lease

Accounting
Handbook
A 2020 GUIDE FOR LESSEES
Implementing processes, controls
and systems, to achieve and
maintain compliance with the
lease accounting standard

1 IFRS 16 Lease Accounting Handbook

TABLE OF CONTENTS

INTRODUCTION
The lease accounting standards
04 . Why the standards were introduced

04 . The major changes

05 .  xhibit 1 | Executive summary of the lease accounting rules

E

SECTION 1
Key provisions & changes in direction
07 . Key changes of the standard

08 . E
 xhibit 2 | Lease accounting under the standard: A real-world example of key issues

10 . Evolution of key issues regarding lease payments

10. Impact of the standard

11.  To meet the timetable for implementation, lessees must begin preparing now

11.  Setting objectives and defining compliance and ROI success

SECTION 2
Achieving & maintaining compliance
14 . Introduction

16. Transitioning to the standard: A comprehensive 8-step process

20. Keeping internal groups up-to-date

21. If you haven’t already, start now

22. Maintaining compliance

22. Summary

2 IFRS 16 Lease Accounting Handbook

 INTRODUCTION

The lease
accounting
standards.
A 2020 guide for lessees.

3 IFRS 16 Lease Accounting Handbook

INTRODUCTION | THE LEASE ACCOUNTING STANDARDS

In 2019, the IASB lease accounting standard, IFRS 16, began to go into effect for
companies worldwide. However, there are still some companies that have yet to
adopt the standard, as well as those who may be struggling with how to handle
leasing processes post-adoption in order to maintain compliance with IFRS 16.
This handbook will provide an overview of the technical accounting of IFRS 16 as well
as how companies can successfully achieve and maintain compliance with the standard.

Why the standard was introduced The major changes for lessees
The change to lease accounting rules comes with The most notable change is the elimination of
many other accounting standard updates, all created the operating lease classification. Under IFRS 16,
with the purpose of closing loopholes in accounting all leases, excluding those that meet the practical
guidance that could potentially allow companies expedient for low-value and short-term leases,
to mislead financial statement users as to the true if elected, are treated as finance leases. The
nature of the company’s financial state. lease assets and liabilities are recognized on the
statement of financial position, which may result
IFRS 16 closes the lease accounting off-balance in a significant increase in the amount of assets
sheet loophole which allowed corporations to report and liabilities many companies report.
their operating leases in the footnotes of financial
statements. Under the new standard, companies are Finance leases are also reported differently on
required to recognize most leases and report them the profit and loss (P&L) statement than operating
as right-of-use (ROU) assets and lease liabilities. As leases under the previous standard. Operating
a result of the shift, lease portfolios face increased leases were reported as a straight-lined rent
auditor scrutiny, pushing companies to focus on expense. However, under IFRS 16, all leases are
ensuring accuracy and completeness of what they reported as a separate (usually straight-lined)
report as well as leading to greater comparability of depreciation expense of the asset and front-loaded
financial statements. interest expense on the liability. Therefore, as a
result of the new standard, all leases expense
on the liability, potentially impacting financial
metrics, like EBITDA, that are dependent on the
P&L statement

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INTRODUCTION | THE LEASE ACCOUNTING STANDARDS

EXHIBIT 1 | EXECUTIVE SUMMARY OF THE LEASE ACCOUNT STANDARD

TIMELINE
• The final standard was issued in 2016.

•C
 ompanies that did not early adopt the standard
The IASB also considers leases to began transitioning to the standard January 1, 2019
be debt, so debt to equity ratios and have continued to do so depending on their
may see a dramatic increase. This fiscal year start date.
could impact debt covenants
not covered by frozen GAAP
LESSEE ACCOUNTING STANDARD SUMMARY
contractual provisions as well as
•A
 ll leases are recognized (except where the
credit ratings, if the lease liability
entity has elected to use the short-term and
recognition resulting from the
lowvalue exemptions) at the present value (PV)
adoption of IFRS 16 is significantly
on the statement of financial position.
different from analysts’
expectations.
•A
 ll leases have a P&L pattern that is frontloaded
(where rent expense is replaced by a usually
Lastly, when measuring the lease
straight-lined depreciation of the asset and
liability, variable rents, such as
front-loaded interest on the liability)
those based on an index or
rate, will be included. IFRS 16
•V
 ariable rents based on a rate (e.g. LIBOR) or an
requires that the lease liability
index (e.g. CPI) are recognized based on spot rates.
be reassessed and remeasured
The value of the lease liability, with a corresponding
anytime the index or rate adjusts.
adjustment to the lease asset, must be remeasured
when the rate or index adjusts

•S
 hort-term (less than or equal to 12 months) and
low-value leases (less than or equal to US $5,000
even if material in the aggregate) can continue to
be accounted for off-balance sheet if so elected.

5 IFRS 16 Lease Accounting Handbook

 SECTION 1

Key provisions
& changes
in direction.
The lease accounting standards.

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SECTION 1 | KEY PROVISIONS & CHANGES IN DIRECTION

Key changes for the standard Present value calculation: The lessee calculates
For lessees, adoption of the rules will result the PV of the estimated lease payments using the
in a significant change from IAS 17 reporting implicit rate in the lease, if it is readily determinable,
where operating leases were off-balance sheet. or the company’s incremental borrowing rate (“the
rate of interest that a lessee would have to pay
Leases capitalized: The operating lease to borrow over a similar term, and with a similar
classification will no longer exist under IFRS 16. security, the funds necessary to obtain an asset of
The new rules will require a lessee to capitalize a similar value to the right-of-use asset in a similar
all leases that do not meet the short-term and economic environment”). However, the IASB, in the
low-value practical expedient lease exemptions. Basis for Conclusions, stated that it is likely to be
difficult for a lessee to determine the interest rate
Estimates of lease term and lease payments: implicit in the lease and as a result it is expected that
For purchase, extension, and termination options, the company’s incremental borrowing rate will be
a lessee should reassess whether the exercise of used in most cases.
an option is “reasonably certain” (and thus must be
recognized) only upon the occurrence of a significant The implicit rate is defined as follows in the new
event or a significant change in circumstances that IASB standard: “The rate of interest that causes the
is within the lessee’s control. present value of (a) the lease payments and (b) the
unguaranteed residual value to equal the sum of
Transition: IFRS 16 provides two transition methods. (i) the fair value of the underlying asset and (ii) any
1. The full retrospective approach: This approach initial direct costs of the lessor.”
requires companies to restate comparative figures for
The PV is considered to be both (1) the value of the
the year prior to adoption by recognizing a cumulative
right to use the leased asset , and (2) the “principal”
effect adjustment to the equity at the beginning of
the prior year. A company’s financial statements are balance of the obligation to pay rent. This amount
presented as though the company has always been will be recorded as both an asset and a liability.
on the standard.
The profit & loss statement: All leases where
2. The modified retrospective approach: Under this
the lessee has not elected the short-term or
approach, the cumulative effect of applying IFRS 16 is
low-value exemptions are accounted for as finance
recognized as an adjustment on the effective date and
leases. The asset is amortized as a depreciation
comparative figures are not restated. The ROU asset
may be recognized as equal to the lease liability or or amortization expense in the P&L over the
may be stated at a value reflecting amortization since estimated lease term on a usually straight-line basis
commencement of the lease with the offset to equity. (SL). Interest expense on the lease liability is front-
Under either method for the ROU asset presentation at loaded. The sum of the interest and amortization
adoption, the lease liability is the same in both elections. creates a front-loaded expense pattern.

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SECTION 1 | KEY PROVISIONS & CHANGES IN DIRECTION

EXHIBIT 2 | LEASE ACCOUNTING: A REAL-WORLD EXAMPLE

Below is an example of lessee accounting under Table 1. 

the IFRS 16 standard and contrast to the previous Illustrated example of the IFRS 16 lease accounting
IAS 17 standard.
ASSUMPTIONS
A company leases several general-use PCs for three
years. The PCs have a useful life of 5 years. There Rent in advance $1,700
is no purchase option.
Term in months 36
The rent is $1,700 a month for 36 months ($61,200 in
total). Under IAS 17, this is considered an operating Incremental borrowing rate $5.50%
lease, as the PV of the payments is less than
substantially all of the fair value of the assets and the Fair value of leased assets $65,000

lease period is for less than the majority of the asset’s

CALCULATIONS
useful life. Under the new IASB standard, the lease must
be treated as a finance lease. That is, it is recognized as PV of payments-inception $56,557
an asset and liability on the balance sheet with interest
Total lease payments $61,2000
expense and amortization expense reported on the
P&L statement.
At a 5.5% incremental borrowing rate, the present Table 2. 
value of the rental payments is $56,557. This is the Annual journal entry summary
amount that is recognized on the balance sheet.
ENTRY TO RECOGNIZE THE LEASE AT INCEPTION
The lessee’s initial balance sheet entries are:
ROU asset $56,557
• Debit Right-of-Use Lease Asset = $56,557
• Credit Lease Obligation = $56,557 Lease liability $56,557

On the P&L, the first year’s interest expense is $2,572 ENTRY TO RECORD FIRST YEAR’S LIABILITY ACTIVITY
and the amortization expense is $18,852. Together,
Inputed interest expense $2,572
these two items total $21,425 for the first year’s
lease expense. Liability $17,828
Under the previous lease standard, the rent expense
Cash $20,400
would total $20,400 on a straight-line basis. Thus,
capitalizing the lease has increased the company’s ENTRY TO RECORD FIRST YEAR’S ASSET ACTIVITY
lease expense by $1,025 in the first year.
Amortization expense $18,852
The cross-over point occurs in the second year of the
lease, when the total lease expense under the new
Accumulated amortization $18,852
standard would be less than the expense under IAS 17.

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SECTION 1 | KEY PROVISIONS & CHANGES IN DIRECTION

EXHIBIT 2 | LEASE ACCOUNTING: A REAL-WORLD EXAMPLE

Table 3. 
Income statement impact of front-ended lease expense

COMPARATIVE REPORTED OPERATING LEASE EXPENSE

Year IFRS Depreciations IFRS Expense IFRS Tool IAS 17 Variance

1 $18,852.36 $2,572.18 $21,424.54 $20,400 $1,024.54

2 $18,852.36 $1,566.55 $20,418.91 $20,400 $18.91

3 $18,852.36 $504.20 $19,356.56 $20,400 $(1,043.44)

TOTAL $56,557.07 $4,642.93 $61,200 $61,200 $0

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Evolution of key issues Impact of the standard

regarding lease payments Companies are seeing significant changes because
Lease term: The IASB decided that the lease term the majority of leases are now reported as finance
is defined at commencement as the noncancellable leases. Potential impacts include higher debt
term plus extension or termination options, where amounts, permanent lost capital, new permanent
the lessee is “reasonably certain” to exercise the deferred tax assets, and temporary reduced
option. Under the standard, for purchase, extension, earnings after taxes in the first years following
and termination options, a lessee should reassess adoption of the standard.
whether the exercise of an option has now reached
the level of “reasonably certain” (and thus must be Ratings agencies have typically included estimates
recognized) only upon the occurrence of a significant of operating lease obligations in their analyses, so
event or a significant change in circumstances that is unless there is a large discrepancy between their
within the lessee’s control. The IASB has stated that estimate and what the company reports, there is
the term “reasonably certain” is a high hurdle. not expected to be a large impact to credit ratings.

Variable lease payments: Only certain variable However, because the IASB considers lease liabilities
lease payments will be included in the lessee’s to be “debt,” the new standard may result in debt
lease capitalization, including: covenant breaches that will require negotiation
and adjustment.
• Variable lease payments that depend on an index
or a rate, using the spot rate at lease inception
Financial metrics like return on assets, liabilities to
for floating leases.
net worth, leverage ratio, EBITDA, etc. can change,

• In-substance fixed payments that are “disguised” so a lessee should make pro forma calculations
minimum lease payments based on usage of the to determine if debt covenants, other contracts,
underlying asset or on lessee performance — or internal performance and incentive plans using
in other words, payments that are unavoidable, those metrics are affected.
in which case the expected payments must be
included in the lease payments to be recognized. Tax Impact — Minimal: The changes to lease
accounting for IASB companies may increase the
administrative burden with regards to tracking
deferred income taxes. This results from differences
between the book value (based on IFRS 16) and
tax calculations (based on unchanging tax laws).

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Operational impact — substantial increase accounting processes, systems, and controls that
in administrative burden: The lease accounting will be required to comply with the new standard.
standard increases a lessee’s administrative burden Companies must: (1) understand the new rules
due to the changes in process controls; data to determine compliance requirements, (2) start
collection, analysis, and maintenance; monitoring; and complete a transition process, and (3) develop
internal reporting systems; and, most importantly, an ongoing process for complying with the new
audit scrutiny. Here are some of the key factors standard beginning on the effective date.
contributing to the added burden:
The lease accounting rules are complex, so
• Data to calculate payments comes from several
lessees must read them in detail to understand
sources in the organization, including Accounting,
Procurement, Accounts Payable, and the asset users. how to comply.

• Calculation of lease payments is complex. Setting objectives and defining

• Non-lease components in gross or bundled billed compliance and ROI success
payments must be separated (unless the practical To address the lease accounting changes, companies
expedient not to separate is selected by asset class).
have to change how they manage their leasing
• Calculation of some payments involves judgments activities. Accounting for operating leases was
and estimates. relatively simple, since those leases were treated as
• Financial disclosure requirements are expanded. operating expenses. Accounting for IFRS 16 leases,
however, requires a much more rigorous approach,
For most companies, the scale of the administrative
given the increase in risk and complexity. Such risks
requirements will mean additional systems and
include the impact of estimation errors as well as
tactical support.
the increased auditor scrutiny.

To meet the timetable for As with any change-management project, you

implementation, lessees must should start by defining the objective, scope, and
prepare now strategy of the project or process. Here is an
For those lessees that have not already adopted,
example of an objective that you might establish
it is critical to not underestimate the timetable for
for your company’s transition to the standard. It is
implementation. This is especially true if a company’
deliberately stated in past tense as if it has already
lease portfolio includes many lease schedules with
been accomplished. The objective is not exclusively
multiple assets, non-homogeneous assets, lessors,
focused on compliance. Instead, it is designed
countries, or languages.
to yield financial returns from the investment in
compliance by improving the financial performance
It is likely to take more than twelve months for
of your leasing process and portfolio.
some companies to fully overhaul the lease

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OBJECTIVE EXAMPLE

By the implementation deadline for the lease accounting changes, we will have developed, deployed,
documented, and iteratively refined a leasing process tha is compliant with the lease accounting
standard. This process will be well-controlled, auditable, automated, and scalable. We will be able to
demonstrate that we made good economic decisions throughout the lease lifecycle.

METRICS EXAMPLE

We know we have been successful and continuously improving. For example, we

in meeting this objective because: know quantitatively how much money we are
• We can generate reports with the push saving by leasing rather than buying. We know
of a button, quickly and easily, for: how much money we could be saving if specific
underperforming people and groups managed
• The lease accounting changes that reflect
their leased assets at the end of term more
the final lease accounting standard.
effectively and returned assets on time. We
• Preparation of our financial reporting
can provide those under-performers with the
disclosures, with full auditability.
automated notifications and scorecards that
• Internal management of all lease terms they need to improve their performance quickly
that require timely decision making. and easily.

• All stakeholders who use the data, • The lease sourcing process is rigorous and
trust the data. includes a standardized lease agreement
with fair terms and conditions in addition to
• All stakeholders in the leasing process receive
requiring a flexible lease structure that will
timely, accurate, and complete reporting and
allow for the lessee to maintain greater control
notifications, especially notifications about the
of the lease program.
endof term.

• The financial performance of our lease

portfolio, processes, and people is measurable

12 IFRS 16 Lease Accounting Handbook

 SECTION 2

Achieving
& maintaining
compliance.
How to continuously meet the
requirements and drive savings.

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SECTION 2 | ACHIEVING & MAINTAINING COMPLIANCE

Introduction Lease vs. Buy: Review of your leasing policies

The remainder of this handbook will provide you includes reviewing your Lease vs. Buy (LvB) analyses.
with comprehensive guidance on implementing the The LvB analysis is not only crucial to achieving
lease accounting standard and best practices for economic efficiencies, but also can serve as a control
maintaining compliance in the long-term. to ensure completeness of your lease portfolio. In
an asset purchase, depreciation is recognized over
Complying with the standard will require the
collaboration of many individuals and departments the asset’s useful economic life. Under IFRS 16, all

within your company. At the same time, the leases are depreciated over the lease term, which
processes we recommend here will achieve usually is less than the useful life of the underlying
major efficiencies in the handling of lease-related asset. Thus, under the lease accounting rules,
information across your entire company and because of additional assets on the balance sheet
improve the financial performance of your leasing and the acceleration of lease costs, the return on
process and portfolio. The result: significant,
assets/return on equity calculations will look worse
recurring, annual cost savings for the company
for a now-capitalized operating lease. However, it is
as a whole and a measurable, positive ROI for
important to recognize that the difference is purely
your compliance project. Thus, while these process
changes are motivated by the need to comply one of timing, which is why LvB analysis is so critical.
with the standard, it is also an investment It compares the option based on present value
in managing the company’s leasing activities analysis, removing the timing difference as a factor.
more effectively.
Why leasing will remain attractive despite
We recommend an 8-step process (page 14) the accounting changes: However, your review
that will most effectively get your entire company of leasing policies should also take into account the
into compliance with the new standard. quantitative and qualitative reasons why leasing will
remain attractive. Under the rules, the accounting
Before you start the 8-step process, it is critical to
benefits for leasing (off-balance sheet financing) will
thoroughly evaluate your company’s leasing policies
only partially recede.
because of: (1) the complexities of the new standard,
(2) the additional administrative burdens that will be
entailed, and (3) the changes that will be required.

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The PV of a lease that covers less than the asset’s There are also many additional reasons why
full economic life is still less than the cost of buying companies lease, and most remain favorable
the same asset. For example, if you lease an asset per the chart below.
for 80% of its economic life, and the terms are fair,
Ultimately, companies should conduct a Lease vs.
you are only paying for 80% of the asset rather
Buy analysis for every major asset procurement
than 100%. Therefore, from a budget perspective
decision to analyze the pros and cons of the two
and on an actual cash flow basis, the amount of
scenarios to ensure that they enter into the most
the capitalized lease payments is still less than the
economical arrangement.
purchase amount.

REASON FOR LEASING DETAILS STATUS AFTER NEW RULES

Additional capital source, 100% Still a major benefit versus a bank loan, especially
Raise Capital financing, fixed rate, level payments, for SME & non‑investment grade lessees with
longer terms limited sources of capital

Low payments/rate due to tax benefits,

Low cost capital Still a benefit versus a bank loan
residual & lessor low cost of funds

Lessee can’t use tax benefits & Lease

Tax benefits vs. Buy shows lease option has lowest Still a benefit
after-tax PV cost

Manage assets;
Lessee has flexibility to return asset Still a benefit — if lessee can manage end of term
Residual risk transfer

Service Outsource servicing of the leased assets Still a benefit

Quick & easy financing process often

Convenience Still a benefit
available at point-of-sale

Regulators should still treat ROU assets

as “capital free” as they are an accounting
Regulatory Capital issues
contrivance and do not represent an
asset in a bankruptcy liquidation

Partial benefit if the PV is less than the cost of the

Accounting Off-balance sheet
asset, which should be true for many leases

Source: https://www.elfaonline.org/docs/default-source/industry-topics/accounting/leaseacctingleasebuydecisionqb07132016.pd

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Transitioning to the Standard: A Comprehensive 8-Step Process

For many companies, leasing will continue to be an important technique for acquiring the use
of assets. At the same time, given the nature and complexity of the requirements under the standard,
establishing the right processes will require substantial time and effort.

To help those companies that have not yet transitioned achieve compliance in an efficient and timely
fashion, we have devised an 8-Step Transition Process to guide you from creating an internal transition team
to acquiring lease accounting software that will facilitate your ongoing compliance efforts with the
lease accounting standard.

STEP 1 assets, it is critically important to acquire software

Create a lease accounting project team specifically for your unique lease management
Companies should create a Lease Accounting requirements. Full Lease Lifecycle Automation is
Project Team that will oversee the transition process, required to capture the data and documents and to
establish timelines, and be fully responsible for maintain the completeness and accuracy required
timely and effective completion of the project. The to generate auditable financial reporting, both on
team should include representative stakeholders the initial deadline and beyond. Furthermore, you
that lease equipment, administer leases, or use must verify that your software provider meets the
information concerning leases from all sites around lease accounting standard’s requirements; can
the globe. These would include Finance/Treasury, support your firm’s transition process; as well as
Procurement, Lease Administration, IT, Accounting, support the processes, policies, and controls you
and other business units. establish for ongoing compliance.

STEP 2 Because leasing is fundamentally an

Deploy software designed for your processes interdepartmental, decentralized process in
and portfolios – Lease Lifecycle Automation most large geographically distributed companies,
for real estate and equipment leases selecting a software system that is web-based or
If your company is still using spreadsheets, a fixed cloud-based is essential to including all of your
asset subledger, or an asset management system (a stakeholders, wherever they may be, in order to
system without the required lease and accounting achieve your objective. The Software-as-a-Service
capabilities) to manage your portfolio of leased (SaaS) model is now widely accepted and available
as a delivery model.

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If you are an international company, the software journal entries at both the asset and summary
should be multicurrency and have the capability to levels with any account configuration.
interact with multiple ERP environments. It should
also have multi-lessor capabilities because most Once you have decided on appropriate
large companies lease from a mix of commercial software, you should configure and integrate
banks, vendor captives, and independent leasing the system for maximum efficiency. You should:
companies.This eliminates the possibility of using (a) include your organizational structure, GL
any software system offered by a single lessor coding, and other business coding; (b) set up
(often offered to clients in an effort to monopolize users, groups, and their authorizations; (c)
their leasing business). integrate the system with your single sign-on,
purchasing, accounts payable, and general
Your software provider should also have the ledger systems where appropriate; and (d) train
ability to integrate with not only your internal ERP, your stakeholders.
procurement, and asset management systems,
but also your lessors’ systems to achieve straight- STEP 3
through processing (STP). Establish a lease information database
To be absolutely sure that you have all the
You also need to be able to load any kind of asset information you need to comply with the
into the system—essentially, whatever you lease: standard, you should establish a new lease
real estate, furniture, airplanes, forklifts, water information database. Of course, you already
coolers, copiers, rail cars, pea pickers (seriously), etc. have accumulated a substantial amount of
data about your current leases. But setting up
To determine whether a particular software solution a completely new database will ensure that
is appropriate, start by giving the prospective all members of the company’s team and all
software provider a sample data set so that you departments that need the information for
can test your data in their system. Then, ascertain compliance will have it at their fingertips. This
whether or not the system can generate capital procedure will also ensure that your current
lease debits and credits for each asset, each database is completely accurate, especially if
transaction, and the portfolio as a whole. If it can’t you scrape the data from the original documents
perform these basic and essential functions, it won’t or reconcile your existing data to your original
support your transition to the lease accounting documents. Here are the steps we recommend:
requirements, and certainly won’t support long-
term compliance. The ability of your software to
• Create a master list of data elements by obtaining
easily integrate into your ERP is also important. Your all relevant reports and data from all stakeholders
software vendor should have the ability to export within your company.

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• Compile a complete set of all internal lease-related STEP 5

documents.
Analyze and triage the end of term-generate
• Capture the required schedule-level and asset-level immediate savings and better data
data for every lease by abstracting and cleansing the
data from the documents. • Generate reports for all asset classes based on their
end-of-term status: return, purchase, or renew.
• Reconcile and integrate data from other sources,
including lessors, vendors, and internal asset • Generate an over-payment (“evergreen”) report to
management systems. determine the status of leases that are past their
original lease end date, including all contractual
• Require asset users to attest to the accuracy and extensions (intentional) and automatic evergreens
completeness of the data. (unintentional).
• Populate your lease administration system with key • Follow up with asset users for every lease schedule past
financial variables such as the borrowing rate for the due and resolve the issues:
company, the spot rate for floating rate leases, and
the CPI for leases with CPI-based variable rents. •U
 pdate information in the lease administration
system at the asset level.
• Load your lease information database into the lease
administration system. •R
 ecalculate expected payments if it is a partial
buyout or partial return, where only some but not
STEP 4 all of the leased asses are purchased or returned,
and reconcile against invoices.
Build a reports library and automate the
distribution of reports to stakeholders • Perform
 analysis with users to determine the best
economic option, make the decision, and act on it.
Create a set of reports that allows you to report
on and analyze all leases and underlying assets, • Calculate savings created from these actions.

expenses, and obligations in your lease portfolio. • Configure end-of-term internal and contractual
The Lease Lifecycle Automation platform that you notifications.

choose should have a library of canned reports • Develop procedures to manage the end of term
effectively:
immediately available when you load your database.
In addition, you should be able to easily build your •P
 ay attention to the date required to notify
own reports from scratch. The reporting should be lessors about end-of-term decisions and use
it as a marker to determine when to notify
automatically updated when you load the data and asset users.
documents for a new lease.
• Include
 asset-level data and economic analysis of
end-of-term options to accelerate the decision
In addition, your software should enable you to send about lease extension.
the reports automatically to any other specified •R
 equire a decision and, if necessary, a commitment,
stakeholder on a routine basis. for the return of the equipment by the deadline.

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•S
 end follow-up automated notifications on the • Identify internal sources for a variety of variables,
date committed for the return of the equipment including intentions to exercise options to renew
and require the asset user to report the date the leases or options to purchase.
equipment was returned, so that you can determine
•M
 anage transactions for efficiency and the benefit of
if you owe anything to the lessor.
internal users; capture new leases as they are signed.
• Create an asset user scorecard, which measures the
•S
 end periodic notifications to asset users to test the
performance of each asset user, and distribute it to
accuracy of the data and capture changes during the
the asset users and their supervisors.
lease term.

•E
 nsure consistency of contractual terms and
STEP 6 conditions for new leases to improve the downstream
Maintain database accuracy administration and accounting process.
and completeness
In order to maintain the accuracy and completeness STEP 7
of your lease information, you must capture all Roll out the leasing process globally
new leases as they become available. Because Having completed all of the previous steps, you will
of the decentralized nature of many companies, be ready to implement the transition to the lease
this is often difficult to accomplish. One strategy accounting standard. Here are the steps in the
that has proven to be effective is to mandate that global rollout:

users around the world use a common, simple, and • Develop a launch strategy that works for your company
automated country-specific Lease vs. Buy tool that is and culture (e.g., by business unit, country, etc.).

integrated with your platform. This will allow you to • Take into account the degree of centralization /
see all of the LvB activity, such that if the outcome of decentralization within the company and with respect
to the conduct of leasing activity.
the LvB analysis is a recommendation to lease, you
can track the transaction as it moves through your • Seek to enable decentralized work and decision making
with centralized controls and reporting.
automated process. LvB is the earliest opportunity
to establish a control that enables distributed, local • Test-launch the transition roll-out with early adopters
decision making while facilitating centralized visibility. and streamline the process by incorporating the
lessons learned (e.g., 6-Sigma approach for repeatability
Here are the steps we recommend to maintain the
and scalability).
accuracy and completeness of your database:
• Train users (or train the trainers, as appropriate for
your company’s culture) on new processes, procedures,
• Gain visibility into your leasing pipeline by mandating
and tools.
a global Lease vs. Buy process and tracking lease
originations. • Communicate with all concerned to achieve universal
adoption of the processes.

19 IFRS 16 Lease Accounting Handbook

SECTION 2 | ACHIEVING & MAINTAINING COMPLIANCE

• Listen to feedback and suggestions from users to • Extension assumptions with Operations
improve the processes incrementally, especially • Changes in floating rate or CPI based variable rents
concerning ease of use.
• Changes in residual guarantees

Auditors may look at historical extensions to

STEP 8
Ongoing activity — generate accounting corroborate assumptions being made on existing
information required by IASB monthly leases. Companies should assume that historical
and annually extensions and evergreen (over-payment) activity
After completing this intensive preparation and will need to be readily available for audit scrutiny.
rollout process, you will be ready to transition to the This will require systems that are more sophisticated
standard at your effective date and continuously and transparent than traditional ERP systems.
improve the performance of your leasing program.
Provide Controller with Reports for Financial
Companies need to develop and implement
Statements: Prepare disclosure information
operating procedures to generate the accounting
annually for the controller’s department to be
information required for financial reporting under
included in the annual report’s leasing footnote.
IFRS rules as required.
The following are the quantitative disclosure

Using the automated reporting function of your requirements for lessees:

Lease Lifecycle Automation platform, you can access

1. Additions to right-of-use assets.
and analyze complete, accurate, and up-to-date
lease information. You can calculate: (1) contractual 2. By class of underlying asset, the year-end carrying
amount of the right-of-use assets.
rents and bargain extension rents, (2) the variable
rents for the term, (3) any expected payment under 3. Lease liabilities.
residual guarantees, (4) the PV of the total estimated 4. Maturity analysis for lease liabilities.
payments over the term, and (5) the principal
5. Depreciation expense of right-of-use assets.
and interest of the lease obligation.
6. Interest expense on lease liability.
Keeping internal groups up-to-date
Meet Routinely: On each accounting reporting 7. Expense relating to short-term leases when they
date as defined by your Controller’s team, review all are exempted from being capitalized.
leasing assumptions with the appropriate internal 8. E
 xpense relating to low-values leases when they
group. For example, review: are exempted from being capitalized.
• Variable rent assumptions with the controller’s team

20 IFRS 16 Lease Accounting Handbook

SECTION 2 | ACHIEVING & MAINTAINING COMPLIANCE

9. Expense
 relating to variable lease payments to prepare deferred tax entries, as the accounting
NOT included in lease liabilities. expense may be different from the tax deductions
for those leases. You should specifically provide the
10. Income from subleases.
actual rent paid (for the tax return) and the deferred
11. Gains/losses from sale-leaseback transactions. tax accounting entry.

12. Total cash outflow for leases.

If you haven’t already, start now
13. Amount of short-term lease commitments Getting ready for the implementation of the lease
when current short-term expenses are not accounting standard takes resources, dedication,
representative of the next year. smart planning, and cooperation across all groups
in the organizations that are involved with leasing
Provide journal entry information: activity.
Provide information for necessary journal entries
directly from the Lease Lifecycle Automation Companies can follow two implementation paths

platform, which has a lessee accounting subledger - a FastTrack, flat fee services project that uses
pre-configured software to get up and running
that can generate debits and credits at a detailed
in 8 weeks, or a more involved and customized
asset level and/or general ledger summary level.
implementation that could run closer to 9-18
months. The more lease transactions in a company’s
Conduct a periodic review of estimates:
portfolio, the longer the transition is likely to take.
Every time the company reports earnings, you
should re-run the entire process as outlined above,
contacting internal sources to get new estimates
of key information. Then, input changes into the
system and assess any requirements for adjusting
journal entries.

Send reports for tax leases to the tax team:

Each year, provide to the tax department actual
rents paid under “true” (tax) leases and accounting
lease expenses for those leases. This information is
to be included in the company’s tax return and used

21 IFRS 16 Lease Accounting Handbook

SECTION 2 | ACHIEVING & MAINTAINING COMPLIANCE

Maintaining compliance In Summary

Compliance with the lease accounting standards The transition process to the lease accounting
doesn’t end once you adopt. IFRS 16 is an ongoing standard includes the development of a leasing
compliance project. To save time and effort
strategy; the creation of processes and controls; and
postadoption, incorporate establishing sustainable
the selection, management, and implementation of
processes, policies, and controls to manage your
software. Throughout the process, it is important
lease portfolio into your project. If you are already
to incorporate lessons learned from companies
postadoption, look to best practices, like requesting
that have already adopted the standards in order
asset updates from the asset users to maintain
to continuously improve the implementation and
accuracy and utilizing a Lease vs. Buy analysis to
ongoing, sustainable processes for lease accounting.
capture new leases and maintain completeness.
Many companies made the mistake of focusing only
on achieving compliance by the deadline and did
not plan for how they would maintain compliance
beyond the deadline, so they fell behind again. It will
save your company from a major headache if you
plan for post-adoption ahead of time and secure
Lease LIfecycle Automation software that you know
is capable of supporting you on day 2 of the new
standards and beyond.

LeaseAccelerator provides a global Lease Lifecycle Automation

platform that improves free cash flow and ensures long-term
compliance across equipment and real estate assets. Thousands of
users rely on our Software as a Service (SaaS) platform to manage
and automate 700,000 leases valued at $200 billion across 5 million
assets in 172 countries that generated 8 billion journal entries.

22 IFRS 16 Lease Accounting Handbook

 LeaseAccelerator Inc.
10740 Parkridge Blvd. Ste. 701, Reston, VA 20191
1-866-446-0980 | www.leaseaccelerator.com

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