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 Lessor Lease Classification
This free, guided checker walks your finance team through the key decision points for IFRS 16 Lessor Lease Classification. 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 entity act as lessor in an arrangement that transfers use of an identified asset?
Confirm a lease exists under IFRS 16.9 - an identified asset (IFRS 16.B13-B20) whose use the customer directs and from which it obtains substantially all the economic benefits - and that this entity is the lessor granting that right. Embedded leases inside supply, transport, or outsourcing contracts meet the same identified-asset and control tests. A common misstep is treating a capacity or take-or-pay arrangement as a lease when the supplier retains a substantive right to substitute the asset.
Apply IFRS 15 revenue or other applicable guidance rather than lessor lease accounting (IFRS 16.9).
Official guidance: IFRS issued standards
Has the lessor separated lease and non-lease components in the contract?
A lessor allocates the consideration in the contract to each lease and non-lease component applying IFRS 15.73-90 on a relative stand-alone selling price basis, and only the lease component is classified as finance or operating (IFRS 16.17). Unlike a lessee, a lessor has no practical expedient to combine components. The common trap is bundling embedded services such as maintenance into lease income, which distorts both the classification and the pattern of income recognition.
Allocate the consideration to lease and non-lease components before classifying the lease (IFRS 16.17).
Official guidance: IFRS issued standards
Does the lease transfer ownership of the underlying asset to the lessee by the end of the lease term?
IFRS 16.63(a) treats a transfer of ownership by the end of the lease term as a situation that normally leads to finance lease classification. Look to the legal terms rather than a stated intention; automatic title passage and a nominal end-of-term transfer both qualify. Do not stop the analysis if title does not transfer, because any one of the other IFRS 16.63 examples or the IFRS 16.64 indicators can still produce a finance lease.
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Official guidance: IFRS issued standards
Does the lessee have a bargain purchase option reasonably certain to be exercised?
IFRS 16.63(b) points to a purchase option priced low enough that, at the inception date, it is reasonably certain the lessee will exercise it. Compare the option price to the asset's expected fair value at the exercise date and weigh the lessee's economic incentive to retain the asset. A frequent error is treating any purchase option as decisive - only a bargain that makes exercise reasonably certain is a finance-lease indicator.
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Official guidance: IFRS issued standards
Does the lease term cover the major part of the economic life of the asset?
IFRS 16.63(c) does not define major part, so the entity applies judgement and a consistent policy; many entities reference a proportion such as 75 percent of remaining economic life while documenting the basis. Measure the lease term, including periods covered by options reasonably certain to be exercised, against the asset's remaining economic life rather than its original life. The trap is comparing against the total original life of a used asset, which understates the ratio.
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Official guidance: IFRS issued standards
Do lease payments amount to substantially all of the fair value of the asset?
IFRS 16.63(d) tests whether, at inception, the present value of the lease payments is at least substantially all of the underlying asset's fair value, discounted at the interest rate implicit in the lease. Document the fair value source and the discount rate, and include guaranteed residual amounts in the payments. Substantially all is judgemental; a benchmark of around 90 percent is often applied consistently, but the conclusion must rest on the specific facts.
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Official guidance: IFRS issued standards
Is the underlying asset of such specialized nature that only the lessee can use it without major modification?
IFRS 16.63(e) captures assets built or configured for the lessee such that redeployment would require major modification. Assess whether the lessor could realistically re-lease or sell the asset to another customer at lease end. Before defaulting to operating lease classification, also weigh the additional indicators in IFRS 16.64 - residual-value risk or cancellation losses borne by the lessee, or a bargain secondary-period rental - which can also point to a finance lease.
With no finance-lease indicator in IFRS 16.63 or 16.64 met, classify the lease as operating and recognise lease income on a systematic basis (IFRS 16.62; IFRS 16.81).
Official guidance: IFRS issued standards
Is the lessor also the manufacturer or dealer of the underlying asset?
A manufacturer or dealer lessor recognises, at commencement of a finance lease, revenue at the lower of the asset's fair value and the present value of the lease payments discounted at a market rate, the cost of sale, and the resulting selling profit or loss (IFRS 16.71). If the lessor is a pure financier this step does not apply. Watch for artificially low quoted interest rates, which IFRS 16.74 requires to be restated to a market rate so that selling profit is not overstated.
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Official guidance: IFRS issued standards
Would recognizing selling profit at commencement create a material loss from initial direct costs?
A manufacturer or dealer lessor expenses the costs incurred to obtain a finance lease when selling profit is recognised, because those costs relate to earning the selling profit and are excluded from the net investment (IFRS 16.75). Where the lessor quoted an artificially low interest rate, restrict selling profit to the amount a market rate of interest would produce (IFRS 16.74). Both answers continue to net-investment measurement; the point is to record commencement-date profit and costs correctly rather than defer them into the receivable.
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Official guidance: IFRS issued standards
Does the present value of lease payments equal the carrying amount of the net investment in the lease?
A finance lease with a difference between the present value of the lease payments and the asset's carrying amount gives rise to a selling profit or loss recognised at commencement (a sales-type lease); when the two are equal and there is no manufacturer or dealer margin, the lease is a direct financing arrangement with income recognised only over the term (IFRS 16.66; IFRS 16.67). Measure the net investment using the interest rate implicit in the lease and include any guaranteed and unguaranteed residual value. The trap is omitting unguaranteed residual value, which understates the net investment.
Classify as a sales-type finance lease and recognise the selling profit or loss and net investment at commencement (IFRS 16.66; IFRS 16.71).
Official guidance: IFRS issued standards
Has the net investment in the lease been measured at commencement with unguaranteed residual value?
The net investment in the lease equals the gross investment (lease payments receivable plus any unguaranteed residual value) discounted at the interest rate implicit in the lease; for lessors other than manufacturers or dealers, initial direct costs are included in the net investment (IFRS 16.67). Confirm the unguaranteed residual value is supported and the implicit rate is derived correctly. A common error is excluding the unguaranteed residual value or using the lessee's incremental borrowing rate instead of the interest rate implicit in the lease.
Recognise a direct financing lease and allocate finance income to produce a constant periodic rate of return on the net investment (IFRS 16.67). Complete the commencement-date measurement of the net investment before recognising the finance lease (IFRS 16.67).
Official guidance: IFRS issued standards
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