IFRS 16 Lease Discount Rate
This free, guided checker walks your finance team through the key decision points for IFRS 16 Lease Discount Rate. Answer a few questions to see the likely treatment and the evidence to document.
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IFRS 16 Lease Incentives and Initial Direct Costs
This free, guided checker walks your finance team through the key decision points for IFRS 16 Lease Incentives and Initial Direct Costs. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
The questions this tool walks you through
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
Is the lease within IFRS 16 lessee recognition scope requiring initial measurement?
IFRS 16 requires a lessee to recognise a right-of-use asset and a lease liability at the commencement date unless the short-term or low-value recognition exemption is elected (IFRS 16.5; IFRS 16.22). Confirm the contract contains a lease and identify any exemption taken. Exempt leases expense payments on a systematic basis and never measure an asset or liability at commencement.
The short-term or low-value recognition exemption applies; recognise lease payments as an expense on a systematic basis and follow expense policy for incentives and IDC (IFRS 16.5; IFRS 16.6).
Official guidance: IFRS issued standards
Are lease incentives receivable from the lessor at or before commencement?
Lessor incentives - rent-free periods, cash contributions, and fit-out allowances - reduce the lease payments used to measure the liability and right-of-use asset (IFRS 16.24(b); IFRS 16.27(a)). Read the lease and side letters to identify every incentive and its timing. The trap is recognising an incentive as separate deferred income instead of netting it against lease payments.
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Official guidance: IFRS issued standards
Have incentives been evaluated for conditions that could cause repayment to the lessor?
Assess each incentive for conditions - such as continued occupancy, performance, or fit-out completion - that could require repayment to the lessor before netting it against lease payments (IFRS 16.27). Gather the incentive terms and any clawback triggers. Conditional or contingent incentives may need separate assessment rather than a straight deduction.
Assess the incentive conditions and any repayment contingency before netting the incentive against lease payments (IFRS 16.27).
Official guidance: IFRS issued standards
Have lease incentives been deducted from lease payments used to measure the lease liability?
Under IFRS 16.27(a) fixed lease payments are reduced by lease incentives receivable when measuring the lease liability, which in turn feeds the right-of-use asset (IFRS 16.24). Confirm the incentive is deducted from the payment stream, not added to the asset. Failing to net the incentive overstates both the liability and the right-of-use asset.
Deduct lease incentives receivable from the fixed lease payments used to measure the lease liability (IFRS 16.27(a)).
Official guidance: IFRS issued standards
Has the lessee incurred initial direct costs related to obtaining the lease?
Initial direct costs are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, such as commissions and external legal fees (IFRS 16.24(c); IFRS 16 Appendix A). Gather the invoices and identify who the cost was paid to and why. Costs incurred whether or not the lease is signed are not initial direct costs.
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Official guidance: IFRS issued standards
Do the costs meet the IFRS 16 definition of initial direct costs rather than general overhead?
Test each cost against the initial direct cost definition: it must be incremental to obtaining this lease (IFRS 16 Appendix A). Internal legal time, allocated overhead, and negotiation costs that would arise regardless of signing fail the test. Only costs that pass are capitalised into the right-of-use asset (IFRS 16.24(c)).
Expense the non-incremental costs in profit or loss rather than capitalising them to the right-of-use asset (IFRS 16 Appendix A).
Official guidance: IFRS issued standards
Are prepaid lease payments present at commencement?
Payments made to the lessor at or before the commencement date - prepaid rent or a deposit applied to rent - are added to the right-of-use asset rather than discounted in the lease liability (IFRS 16.24(b)). Identify amounts already paid at commencement. Including a prepayment in the discounted liability instead of the asset misstates the measurement.
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Official guidance: IFRS issued standards
Have restoration, dismantling, or decommissioning costs been included in ROU asset cost?
Where the lessee has an obligation to dismantle, remove, or restore the asset or site, the estimated cost is included in the right-of-use asset with a corresponding IAS 37 provision (IFRS 16.24(d)). Assess the lease and applicable law for restoration clauses. Omitting the restoration component understates both the asset and the provision at commencement.
Assess any dismantling or restoration obligation and, if present, include it in the right-of-use asset cost with an IAS 37 provision (IFRS 16.24(d)).
Official guidance: IFRS issued standards
Has total ROU asset cost been computed as liability plus prepayments, IDC, and restoration costs?
The right-of-use asset at commencement equals the lease liability plus payments made at or before commencement (net of incentives), initial direct costs, and estimated restoration costs (IFRS 16.24). Rebuild the asset from these components and tie each to support. A common error is setting the asset equal to the liability and omitting the other components.
Complete the right-of-use asset cost build-up from all IFRS 16.24 components before initial recognition.
Official guidance: IFRS issued standards
Has the lease liability been measured at the present value of unpaid lease payments net of incentives?
The lease liability is the present value of the lease payments not paid at commencement, discounted at the interest rate implicit in the lease or, if not readily determinable, the incremental borrowing rate (IFRS 16.26). Include fixed and in-substance fixed payments and amounts tied to an index or rate at commencement, net of incentives receivable (IFRS 16.27). Exclude variable payments not linked to an index or rate.
Complete the present value calculation of the unpaid lease payments to measure the lease liability (IFRS 16.26).
Official guidance: IFRS issued standards
Has the initial journal entry been reconciled to the lease subledger and general ledger?
Reconcile the commencement entry - right-of-use asset, lease liability, prepayments, initial direct costs, and restoration provision - to the lease subledger and the general ledger (IFRS 16.24). Confirm the components sum to the recorded asset and liability. Unreconciled commencement entries are a frequent source of downstream depreciation and interest errors.
Reconcile the commencement entries to the lease subledger and general ledger before period close (IFRS 16.24).
Official guidance: IFRS issued standards
Are incentives, IDC, and commencement measurement disclosures prepared?
Disclose additions to right-of-use assets, and explain material judgements on incentives, initial direct costs, and restoration costs, in line with the IFRS 16 disclosure objective (IFRS 16.51; IFRS 16.53). Confirm the note ties to the commencement measurement. Omitting the incentive and initial direct cost judgements is a common disclosure gap.
Incentives, initial direct costs, and commencement measurement are complete with disclosures prepared (IFRS 16.53). Complete the IFRS 16 note disclosures for incentives and initial direct costs (IFRS 16.53).
Official guidance: IFRS issued standards
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