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 Lessee Assessment
This free, guided checker walks your finance team through the key decision points for IFRS 16 Lessee Assessment. 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.
Does the contract depend on an explicitly or implicitly identified asset?
A lease exists only if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration (IFRS 16.9). The asset is identified when it is explicitly or implicitly specified and the supplier has no substantive right to substitute an alternative asset throughout the period of use (IFRS 16.B13-B20). Cloud or hosted software where the customer does not control the underlying software is not a lease; test any supplier substitution right for substance before concluding an asset is identified.
Account for the arrangement as a service or intangible licence unless another standard applies (IFRS 16.9, IFRS 16.B9-B31).
Official guidance: IFRS issued standards
Does the customer obtain substantially all economic benefits from using the asset?
Assess whether the customer obtains substantially all the economic benefits from use of the asset throughout the period of use, considering benefits within the defined scope of the contract (IFRS 16.B21-B23). Include the asset's primary outputs, by-products, and other economic benefits such as renewable energy credits or sublease income. Benefits arising from ownership rather than use, such as certain tax credits, are excluded from this test.
The customer does not obtain substantially all the economic benefits, so it does not control the asset's use and there is no lease (IFRS 16.B21-B23).
Official guidance: IFRS issued standards
Does the customer direct how and for what purpose the asset is used?
The customer directs the use of the asset when it decides how and for what purpose the asset is used throughout the period of use (IFRS 16.B24-B30). Where those decisions are predetermined, control can still exist if the customer designed the asset or has the right to operate it without the supplier being able to change that design (IFRS 16.B24(b)). Weigh who makes the relevant decisions about output, timing, and location, not merely who performs day-to-day operation.
The supplier directs how and for what purpose the asset is used, so the customer does not control its use and there is no lease (IFRS 16.B24-B31).
Official guidance: IFRS issued standards
Have lease and non-lease components been identified and allocated under the elected policy?
Separate the lease component from non-lease components such as maintenance, common-area services, or a software licence, and allocate the consideration on a relative stand-alone price basis (IFRS 16.12-13). A lessee may instead elect, by class of underlying asset, the practical expedient to account for lease and non-lease components as a single lease component (IFRS 16.15). Complete this before measuring the liability, because non-lease amounts are excluded from lease payments.
Complete the identification and allocation of lease and non-lease components before recognition (IFRS 16.12-15).
Official guidance: IFRS issued standards
Does the lease qualify for a short-term or low-value recognition exemption elected by the entity?
The short-term exemption applies to leases with a term of 12 months or less that contain no purchase option, assessed at the commencement date (IFRS 16.5(a), IFRS 16.7). The low-value exemption is assessed on the value of the underlying asset when new, on an absolute basis independent of the lessee's size, and applies lease-by-lease (IFRS 16.5(b), IFRS 16.8, IFRS 16.B3-B8). If an exemption is elected, expense the payments; otherwise recognise a right-of-use asset and lease liability.
Apply the elected recognition exemption and expense payments systematically (IFRS 16.5-6).
Official guidance: IFRS issued standards
Have enforceable extension and termination options been reflected in the reasonably certain lease term?
Determine the lease term as the non-cancellable period plus periods covered by extension options the lessee is reasonably certain to exercise, less periods covered by termination options the lessee is reasonably certain to exercise (IFRS 16.18). Base reasonably certain on economic incentives at the commencement date, such as below-market renewal rents, significant leasehold improvements, and relocation costs (IFRS 16.B37). Disregard options that only the lessor can exercise (IFRS 16.B35).
Complete the lease-term assessment for reasonably certain option exercise before measurement (IFRS 16.18-19).
Official guidance: IFRS issued standards
Have in-substance fixed payments, residual guarantees, and restoration costs been included in lease payments?
Lease payments included in the liability 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 if reasonably certain, and termination penalties if the term reflects termination (IFRS 16.27). Restoration and dismantling obligations are not lease payments; they form part of the right-of-use asset cost (IFRS 16.24(d)). The trap is omitting in-substance fixed payments that are presented as variable.
Complete the payment schedule, including in-substance fixed payments and residual value guarantees, before initial recognition (IFRS 16.27).
Official guidance: IFRS issued standards
Has the incremental borrowing rate been documented when the implicit rate is not readily determinable?
Discount the lease payments at the interest rate implicit in the lease; if that rate cannot be readily determined, use the lessee's incremental borrowing rate (IFRS 16.26). Build the incremental borrowing rate from a rate for a loan of similar term, currency, and security, in a similar economic environment, adjusted for the right-of-use asset as collateral. Document the inputs, because the discount rate materially affects the measured liability and is a common audit focus.
Recognize and measure the right-of-use asset and lease liability at the commencement date (IFRS 16.22-26). Document the incremental borrowing rate methodology before initial recognition (IFRS 16.26).
Official guidance: IFRS issued standards
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