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 Sublease Accounting
This free, guided checker walks your finance team through the key decision points for IFRS 16 Sublease Accounting. 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.
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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 an intermediate lessor by subleasing a right-of-use asset from a head lease?
IFRS 16 Appendix A defines a sublease as a transaction in which a lessee (the intermediate lessor) re-leases an underlying asset to a third party while the head lease between the head lessor and that lessee remains in effect. Run the test by confirming the entity holds a head lease and has granted a sublessee the right to use all or part of the same asset. The common trap is treating a direct lease of an owned asset, or a pure service arrangement, as a sublease.
Account for the arrangement under the applicable lessee, lessor, or service model because it is not a sublease of a head lease right-of-use asset (IFRS 16 Appendix A; IFRS 16.58).
Official guidance: IFRS issued standards
Is the head lease within IFRS 16 scope with a recognized right-of-use asset?
The intermediate lessor continues to account for the head lease as a lessee, so a right-of-use asset should normally have been recognised at head lease commencement (IFRS 16.22). Check whether the head lease qualified for the short-term or low-value exemption, because if it was accounted for under paragraph 6 the sublease is automatically an operating lease (IFRS 16.58(a)). The common trap is applying the sublease classification test when no head lease right-of-use asset exists.
Confirm the head lease is recognised, or if it is a short-term lease that the sublease is operating under IFRS 16.58(a), before applying the sublease model (IFRS 16.22; IFRS 16.58(a)).
Official guidance: IFRS issued standards
Does the sublease transfer the right to use all or a portion of the head lease asset for a period?
A sublease exists only where the arrangement conveys the right to control the use of an identified asset for a period in exchange for consideration (IFRS 16.9; IFRS 16.B9 to B31). Test by confirming the sublessee directs the use of, and obtains substantially all the economic benefits from, all or a physically distinct portion of the asset. The common trap is classifying a service or shared-space arrangement, where the entity retains control, as a sublease.
Reassess whether the arrangement conveys the right to control the use of an identified asset; if not, it is a service agreement rather than a sublease (IFRS 16.9; IFRS 16.B9).
Official guidance: IFRS issued standards
Has the class of underlying asset in the head lease been retained for sublease classification?
IFRS 16.58(b) requires an intermediate lessor to classify the sublease by reference to the right-of-use asset arising from the head lease, not the underlying physical asset. Run the test using the carrying amount and remaining term of the head lease right-of-use asset as the reference point. The common trap is comparing the sublease to the economic life or fair value of the underlying property, which usually produces an operating classification in error.
Classify the sublease by reference to the right-of-use asset arising from the head lease, not the underlying physical asset (IFRS 16.58(b)).
Official guidance: IFRS issued standards
Does the sublease transfer substantially all the risks and rewards of the head lease right-of-use asset?
IFRS 16.62 classifies a sublease as a finance lease when it transfers substantially all the risks and rewards incidental to ownership of the head lease right-of-use asset, with the indicators in IFRS 16.63. Test whether the sublease term covers the major part of the remaining head lease term, or the present value of the sublease payments amounts to substantially all the fair value of the right-of-use asset. The common trap is defaulting to operating classification without comparing the sublease against the remaining head lease right-of-use asset.
Use the interactive tool above to see how this applies to your situation.
Official guidance: IFRS issued standards
Has the finance sublease net investment been measured at present value of sublease payments?
For a finance sublease, IFRS 16.67 requires the intermediate lessor to recognise a net investment in the sublease at the present value of the sublease payments, and IFRS 16.68 sets the discount rate as the interest rate implicit in the sublease or, if that cannot be readily determined, the head lease discount rate. Run the test by discounting the sublease payments and any unguaranteed residual value at that rate. The common trap is measuring the net investment using the lessee's incremental borrowing rate instead of the implicit or head lease rate.
Measure the finance sublease net investment at the present value of the sublease payments using the implicit or head lease discount rate (IFRS 16.67; IFRS 16.68).
Official guidance: IFRS issued standards
Has the gain or loss on head lease ROU derecognition been calculated for the finance sublease?
On entering a finance sublease, the intermediate lessor derecognises the head lease right-of-use asset relating to the sublease and recognises the net investment; the difference is a gain or loss in profit or loss, and the head lease liability is retained (IFRS 16.67). Compute the gain or loss as the net investment less the carrying amount of the derecognised portion of the right-of-use asset. The common trap is leaving the head lease right-of-use asset on the balance sheet alongside the new net investment.
Recognise the difference between the net investment in the sublease and the carrying amount of the derecognised head lease right-of-use asset in profit or loss (IFRS 16.67).
Official guidance: IFRS issued standards
Is the sublease classified as operating with head lease ROU asset retained?
An operating sublease does not transfer substantially all the risks and rewards, so the intermediate lessor retains the head lease right-of-use asset and continues to depreciate it, recognising sublease income separately (IFRS 16.58(b); IFRS 16.81). Confirm the classification conclusion before proceeding, because retaining the right-of-use asset is only correct for an operating sublease. The common trap is derecognising the right-of-use asset on an operating sublease.
Reassess whether the sublease transfers substantially all the risks and rewards of the head lease right-of-use asset before concluding it is operating (IFRS 16.62; IFRS 16.63).
Official guidance: IFRS issued standards
Has sublease income been recognized systematically without offsetting head lease expense?
IFRS 16.81 requires operating sublease income to be recognised on a straight-line or other systematic basis over the sublease term, presented separately from the head lease depreciation and interest expense. Test by confirming income and head lease expense are grossed up rather than netted to a single line. The common trap is offsetting sublease income against head lease costs, which understates both gross lease income and gross lease expense.
Recognise operating sublease income on a systematic basis without offsetting the head lease depreciation and interest (IFRS 16.81).
Official guidance: IFRS issued standards
Has the sublease term been assessed including options and linkage to remaining head lease term?
The sublease term is the non-cancellable period plus any options the sublessee is reasonably certain to exercise (IFRS 16.18), constrained by the enforceable head lease period (IFRS 16.B34). Run the test by confirming the sublease term, including options, does not extend beyond the point to which the head lease is enforceable. The common trap is granting or measuring a sublease over a term longer than the enforceable head lease, which cannot be supported unless the head lease is modified or extended.
Align the sublease term with the enforceable head lease term; the sublease term cannot exceed the enforceable head lease period (IFRS 16.18; IFRS 16.B34).
Official guidance: IFRS issued standards
Are head lease and sublease modifications monitored for linked remeasurement impacts?
Because the sublease is classified by reference to the head lease right-of-use asset, a head lease modification (accounted for as a lessee modification under IFRS 16.44 to 16.46) can change the reference asset and require the sublease to be reassessed, while a sublease modification is accounted for by the intermediate lessor under IFRS 16.79 or 16.87. Run the test by tracing each modification through to both the head lease and the sublease. The common trap is remeasuring the head lease without reassessing the linked sublease classification and net investment.
Establish controls to monitor head lease modifications and reassessments that can change the sublease classification (IFRS 16.44; IFRS 16.58(b)).
Official guidance: IFRS issued standards
Are sublease and head lease linkage disclosures prepared?
An intermediate lessor discloses sublease income or finance income on the net investment and the judgements applied in classifying the sublease by reference to the head lease right-of-use asset (IFRS 16.90; IFRS 16.92). Prepare the note by pulling the net investment, finance income, or operating sublease income and describing the head lease linkage. The common trap is omitting the classification judgement and the relationship between the head lease and the sublease.
Sublease classification, measurement, and disclosures are complete with the head lease linkage maintained (IFRS 16.58; IFRS 16.90). Complete the IFRS 16 note disclosures on sublease income or finance income and the classification judgements (IFRS 16.90; IFRS 16.92).
Official guidance: IFRS issued standards
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