IFRS 16 Leases requires lessees to bring most leases onto the balance sheet. The lease liability is measured at the present value of the lease payments. But which lease payments should be included in the lease liability, initially and subsequently?

The answer to this question will determine the scale of the impact of the new standard for lessees. 

Our publication Lease payments (PDF 1.7 MB) will help you. It provides an overview of how to determine the lease payments, initially and subsequently. 

Lessees: Changes in practice

In many ways, the new requirements are mercifully simple – e.g. lessees do not need to forecast future payments that depend on sales, usage or inflation. However, the detailed rules are different from current practice in important ways.

One key difference is that certain lease payments are reassessed over the term of the lease, and the lease liability adjusted accordingly. This introduces new balance sheet volatility. It also requires new systems and processes to determine the revised lease payments and recalculate the lease liability.

What’s included in the lease liability?

At the commencement date, a lessee measures the lease liability as the present value of lease payments that have not been paid at that date.

The payments included comprise:

  • fixed payments (including in-substance fixed payments), less any lease incentives receivable;
  • variable lease payments that depend on an index or rate;
  • amounts expected to be payable by the lessee under residual value guarantees;
  • the exercise price of a purchase option that the lessee is reasonably certain to exercise; and
  • payments for terminating the lease unless it is reasonably certain that early termination will not occur.

What’s excluded from the lease liability?

In practice, lease contracts may contain payments that are excluded from the lease liability, such as:

  • non-lease components – e.g. payment for services; and
  • variable lease payments that depend on sales or usage of the underlying asset.


Lessees are required to separate lease and non-lease components of a contract, unless they apply the practical expedient in paragraph 15 allowing them not to separate the two.

Lessors: Allocating consideration

The new standard has a less dramatic impact on lessors. For them, a key focus will be allocating the consideration in contracts with multiple components to determine the lease payments. This will sometimes be a disclosure-only question, but those disclosures could be sensitive for some lessors.

Identifying all lease agreements and extracting lease data

Lessees will now recognize most leases on-balance sheet. This may require a substantial effort to identify all leases with payments that should be included in the lease liability, and whether they need to be subsequently reassessed for changes in lease payments.

New estimates and judgements

The new standard introduces new estimates and judgements that affect the measurement of lease liabilities. A lessee determines the liability on commencement and may be required to revise it – e.g. if the assessment of whether an option is reasonably certain to be exercised, or if the amount expected to be paid under a residual value guarantee changes. This will require ongoing monitoring and increase financial statement volatility.

Balance sheet volatility

The new standard introduces financial statement volatility to gross assets and liabilities for lessees, due to the requirements to reassess certain key estimates and judgements at each reporting date. This may impact a company’s ability to accurately predict and forecast results and will require ongoing monitoring.

Changes in contract terms and business practices

To minimize the impact of the new standard, some companies may wish to reconsider certain contract terms and business practices – e.g. changes in the structuring or pricing of a lease agreement, including the type of variability of lease payments and the inclusion of options in the contract. The new standard is therefore likely to affect departments beyond financial reporting – including treasury, tax, legal, procurement, real estate, budgeting, sales, internal audit and IT.

New systems and processes

Systems and process changes may be required to capture the data necessary to comply with the new requirements. New calculations and review processes will be needed to measure the lease liability on commencement and to subsequently identify when a lease needs to be reassessed and remeasured to reflect changes in lease payments.

Careful communication with stakeholders

Investors and other stakeholders will want to understand the new standard’s impact on the business. Areas of interest may include the effect on financial results, the costs of implementation and any proposed changes to business practices.

Sufficient documentation

The judgements, assumptions and estimates applied in determining how to measure the lease liability on the commencement date, as well as on reassessment, will need to be documented

Find out more

Read our full publication for an overview of how to determine the lease payments, initially and subsequently, with many worked examples to help you prepare to adopt the new standard.

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