Rental contracts for real estate are therefore an important part of many IFRS 16 projects. Tenants are presented with many practical accounting challenges in making the following assessments:

  • lease lengths
  • assessing renewal options
  • the classification of rental adjustment mechanisms
  • the distinction between lease and non-lease components
  • the difference between the value in use and the underlying value of the property
  • discount rates that are difficult to determine

In addition to these challenges, tenants will notice that the IFRS-16 standard significantly changes the way leases are accounted for in financial reporting. That in turn affects important financial ratios and impacts indirectly on loan covenants with the bank.

The periodic assessment of leases therefore requires a thorough knowledge of both IFRS-16 and the leases themselves.

It is therefore relevant for organisations that account under IFRS to consider the impact of ownership or long-term leases on the balance sheet and therefore the financial ratios of the organisation. In that context, one must always consider whether ownership or rent is the best option in each specific case (in addition to other strategic considerations, of course). Do you want to convert your property ownership into rental? Read our article “Sale & lease back as a panacea?”.

See also our publication ‘Lease accounting driver for change in decision-making about Corporate Real Estate’ and ‘Tim Schelle conducts graduation research at REDEPT’.

StellrWeb Photo on Unsplash

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