How IFRS 16 has transformed lease accounting and defined best practice

The implementation of IFRS 16 has marked a significant shift in lease accounting. Introduced to organisations on the 1st of April 2022, IFRS 16 replaced IAS 17 and brought with it a more transparent and comprehensive approach to lease reporting.

A recent post-implementation review conducted by HM Treasury (HMT) in the United Kingdom offers valuable insights into how the standard has reshaped financial reporting and what constitutes best practice moving forward.

A new lease on transparency

At its core, IFRS 16 requires lessees to recognise most leases on the balance sheet, recording both a right-of-use asset and a corresponding lease liability. This change enhances visibility into an entity’s financial obligations and provides users of financial statements with a clearer picture of how leases impact financial position, performance, and cash flows.

For organisations, this shift was more than a technical adjustment - it was a cultural change in how leases are understood and managed. The standard’s implementation demanded extensive coordination, guidance, and adaptation, particularly given the complexity of public sector leasing arrangements.

Implementation insights: What worked and what didn’t

The review by HMT, conducted across three strands (Preparers, Users, and the Financial Reporting Advisory Board (FRAB)), highlighted several key findings:

1. Preparers’ perspective

Preparers generally felt well-supported throughout the implementation of IFRS 16. However, they noted areas for improvement:

• Timing: More lead time for consultation before the implementation, as well as avoiding summer recess periods, would have improved engagement with the new standard from the outset
• Guidance depth: There was a call for more worked examples and clearer explanations of public sector adaptations specific to IFRS 16 use cases
• Judgement support: Departments sought further support in making initial judgements prior to audit scrutiny against the new standard

2. Users’ perspective

While user feedback was limited, responses from Parliament and the User and Preparer Advisory Group (UPAG) were positive. Users valued the disclosures made in 2022–23 and recognised IFRS 16’s role in improving accountability. However, they encouraged departments to go beyond mandatory disclosures and embrace best practice reporting, with suggestions including:

• Linking IFRS 16 notes to specific projects and programmes
• Clarifying the impact of leases now on the balance sheet on expenditure and cash flow
• Providing more accessible explanations for the change for non-accountants

The implementation of IFRS 16 was not a change exclusive to finance teams. More robust understanding throughout the
entire organisation is crucial to successfully adhering to the standard.

3. FRAB’s perspective

FRAB’s feedback was largely positive, praising HMT’s stakeholder engagement and documentation. However, members noted:

• The complexity of IFRS 16 made it difficult for non-accountants to engage
• Implementation revealed gaps in lease data quality
• More field testing and early adoption pilots could have helped identify challenges earlier

While the implementation was largely a success, the feedback from each of the above groups indicates that the standard has unique complexities. Having a team of Chartered Accountants and a dedicated IFRS 16 lease accounting platform like LOIS can help to clarify issues and streamline processes for your organisation.

Best practice in lease accounting under IFRS 16

The HMT review underscores several principles that define best practice in lease accounting:

1. Clear and comprehensive disclosures

Entities should not only meet the minimum disclosure requirements but also provide context, explaining the rationale behind lease decisions, linking disclosures to operational activities, and clarifying the impact on financial metrics.

2. Robust guidance and knowledge sharing

Central guidance should be complemented by peer-to-peer learning. Sharing real-world scenarios and solutions fosters consistency and improves judgement quality.

3. Engagement across functions

Lease accounting under IFRS 16 is not just a finance issue. Estates teams, procurement, and operational managers must understand the implications. Outreach and training for non-accountants are both essential to ensure informed decision-making across a whole organisation.

4. Continuous improvement

Best practice is not static. Ongoing reviews of how an organisation is faring with implementing IFRS 16 ensures that the principles are being adhered to, which will help to keep auditors happy throughout reporting season.

IFRS 16 has undeniably reshaped the lease accounting landscape, bringing greater transparency and accountability. HMT's post-implementation review highlights the importance of collaboration, clarity, and continuous improvement in achieving successful adoption.

As departments and organisations continue to refine their approach, the lessons from IFRS 16 will inform the implementation of future standards. For those navigating the complexities of lease accounting, embracing best practice is not just beneficial - it’s essential.

Learn how your organisation can benefit from using a dedicated lease accounting platform like LOIS.