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IFRS 16

Leases

IFRS 16 requires lessees to recognise a right-of-use asset and a lease liability for substantially all leases, bringing most lease commitments onto the balance sheet and eliminating the previous operating/finance lease distinction for lessees, while lessor accounting remains largely unchanged from the classification approach it replaced. [S1]

Effective 2019-01-01Related: IAS 1 · IAS 16 · IAS 21 · IAS 36 · IFRS 15

Overview

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration — control meaning the customer has both the right to obtain substantially all the economic benefits from use of the asset and the right to direct its use. [S1] A lessee recognises a right-of-use asset and a corresponding lease liability at commencement for (almost) every lease, subject to optional exemptions for short-term leases (12 months or less) and leases of low-value underlying assets. Lessor accounting continues to classify each lease as a finance lease or an operating lease, substantially carrying forward the previous approach. [S2]

Why it matters

IFRS 16 fundamentally changed how leased assets appear in the financial statements of a lessee: what used to be an off-balance-sheet operating lease expense is now an on-balance-sheet asset and liability, front-loading the total expense recognised (depreciation plus interest, versus a straight-line rental charge) and affecting leverage ratios, EBITDA, and covenant calculations. For property-heavy and retail businesses, and for any Nigerian company leasing significant office, warehouse, or retail space, this is one of the most consequential balance sheet changes a first-time IFRS conversion will surface.

Scope

Applies to all leases, including subleases, except leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources, leases of biological assets within IAS 41, service concession arrangements within IFRIC 12, licences of intellectual property granted by a lessor within IFRS 15, and rights held by a lessee under licensing agreements within IAS 38. A lessee may elect, as an accounting policy by class of underlying asset (for low-value assets) or lease-by-lease (for short-term leases), not to apply the recognition requirements, instead recognising lease payments as an expense on a straight-line basis (or another systematic basis).

Key definitions

term
Lease
definition
A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
term
Right-of-use asset
definition
An asset representing a lessee's right to use an underlying asset for the lease term.
term
Lease liability
definition
A lessee's obligation to make lease payments arising from a lease, measured on a discounted basis.
term
Lease term
definition
The non-cancellable period of a lease, together with periods covered by an option to extend if the lessee is reasonably certain to exercise it, and periods covered by an option to terminate if the lessee is reasonably certain not to exercise it.
term
Incremental borrowing rate
definition
The rate of interest a lessee would have to pay to borrow, over a similar term and with similar security, the funds necessary to obtain an asset of similar value in a similar economic environment — used to discount lease payments when the interest rate implicit in the lease cannot be readily determined.
term
Short-term lease
definition
A lease that, at the commencement date, has a lease term of 12 months or less and does not contain a purchase option.

Recognition

At the commencement date, a lessee recognises a right-of-use asset and a lease liability for every lease other than short-term and low-value leases it elects to exempt. The lease liability is initially measured at the present value of lease payments not yet paid, discounted using the interest rate implicit in the lease if readily determinable, or otherwise the lessee's incremental borrowing rate. Lease payments included in the measurement comprise fixed payments (including in-substance fixed payments), variable payments that depend on an index or rate, amounts expected to be payable under residual value guarantees, exercise price of a purchase option the lessee is reasonably certain to exercise, and termination penalties if the lease term reflects the lessee exercising an option to terminate.

Initial measurement

The right-of-use asset is initially measured at cost, comprising the initial amount of the lease liability, any lease payments made at or before commencement (less lease incentives received), any initial direct costs incurred by the lessee, and an estimate of costs to dismantle, remove or restore the underlying asset or site, to the extent a present obligation exists. The lease liability is initially measured at the present value of remaining lease payments, discounted at the rate implicit in the lease or, if that is not readily determinable, the lessee's incremental borrowing rate at commencement.

Subsequent measurement

The right-of-use asset is generally depreciated on a straight-line basis over the shorter of the lease term and the asset's useful life (or over the useful life if ownership transfers or a purchase option is reasonably certain to be exercised), and is tested for impairment under IAS 36. The lease liability is subsequently measured using the effective interest method, increasing for interest accrued and decreasing for lease payments made, and is remeasured to reflect reassessments of the lease term, changes in expected residual value guarantee payments, or changes in future lease payments arising from a change in an index or rate, with a corresponding adjustment to the right-of-use asset.

Presentation

Right-of-use assets are presented either as a separate line item or disclosed together with the class of PPE they relate to (with disclosure of which line items include them); lease liabilities are presented separately from other liabilities or disclosed separately if not presented separately, split between current and non-current. In the statement of cash flows, the principal portion of lease payments is a financing activity, interest is classified according to the entity's policy for interest paid, and payments for short-term/low-value leases and variable lease payments not included in the lease liability are generally operating activities.

Disclosure checklist

  • Depreciation charge for right-of-use assets by class of underlying asset.
  • Interest expense on lease liabilities.
  • Expense relating to short-term leases, low-value asset leases, and variable lease payments not included in the measurement of lease liabilities.
  • Total cash outflow for leases, and additions to right-of-use assets during the period.
  • A maturity analysis of lease liabilities, separately from the maturity analysis of other financial liabilities.
  • Information about leases not yet commenced to which the lessee is committed, and about extension/termination options, residual value guarantees, and restrictions imposed by leases.

Practical treatment

The threshold judgements are: (1) identifying whether a contract is, or contains, a lease at all (an identified asset plus the right to control its use, versus a pure service contract where the supplier controls how the service is delivered); (2) determining the lease term, including a genuine assessment of whether extension or termination options are reasonably certain to be exercised, not simply defaulting to the initial non-cancellable period; and (3) determining the discount rate, since the rate implicit in the lease is rarely disclosed by a lessor and the incremental borrowing rate must instead be derived with reference to the lessee's own credit standing, the lease term, and the economic environment and currency of the lease. See nigeria_notes for the practical challenge of deriving a defensible incremental borrowing rate in Nigeria and the property-lease-specific issues that recur locally.

Common mistakes

  • Treating every service contract with dedicated equipment or space as a lease without properly assessing whether the customer, rather than the supplier, actually directs how and for what purpose the asset is used.
  • Defaulting the lease term to the shortest non-cancellable period without a genuine assessment of renewal options the lessee is reasonably certain to exercise (common where renewal is economically compelling but not contractually guaranteed).
  • Using an arbitrary or group-wide discount rate instead of deriving an incremental borrowing rate that reflects the lessee entity's own credit standing, the specific lease term, and the currency and economic environment of the lease.
  • Failing to remeasure the lease liability (and adjust the right-of-use asset) when a rent review clause changes payments linked to an index or rate.
  • Applying the low-value asset exemption to assets that are individually low value but leased in a large fleet or portfolio where the aggregate effect is material and the underlying assets are not each independently of low value in substance.
  • Continuing to expense lease payments on a straight-line basis for a lease that does not qualify for the short-term or low-value exemption.

CFO checklist

  • Maintain a complete lease register capturing every property, equipment and vehicle lease, including embedded leases within service contracts.
  • Document the lease-term assessment for each lease, including the basis for concluding whether renewal or termination options are reasonably certain to be exercised.
  • Derive and document a defensible incremental borrowing rate methodology by currency, term and lessee entity, refreshed whenever new leases commence.
  • Track index/rate-linked rent review clauses and ensure the lease liability is remeasured when they take effect.
  • Confirm the short-term and low-value lease exemptions are applied consistently and only where genuinely qualifying, with a documented policy.
  • Reconcile the lease liability roll-forward (additions, interest, payments, remeasurements) to the cash paid for leases each period for the cash flow statement disclosure.

FAQs

q
We lease office space with a 3-year term and an option to renew for a further 3 years that we're very likely to exercise — what lease term do we use?
a
If the entity is reasonably certain to exercise the renewal option (based on economic incentives such as the cost and disruption of relocating, favourable renewal terms, or the strategic importance of the location), the lease term should include the renewal period, giving a 6-year lease term rather than just the initial 3 years.
q
Do we recognise a right-of-use asset for a photocopier leased for 18 months?
a
Yes, unless the entity elects the short-term lease exemption, which is only available for leases with a term of 12 months or less at commencement; an 18-month lease does not qualify, regardless of how low-value the equipment is, since the short-term test is about lease term, not asset value.
q
Our rent is reviewed annually based on inflation — do we need to do anything when the rent changes?
a
Yes. A change in lease payments arising from a change in an index or rate used to determine those payments requires the lease liability to be remeasured (using the same discount rate, unless the change also affects the discount rate itself), with a corresponding adjustment to the right-of-use asset, not simply expensed as it occurs.

Nigeria application notes

Regulatory overlay

IFRS 16 applies in full to Nigerian public interest entities under the FRCN Act 2011 mandate. [S3] Land tenure for Nigerian property leases sits within the framework of the Land Use Act 1978, under which the underlying land is held by the lessor (or its own lessor, ultimately the state Governor) under a right of occupancy rather than freehold; this affects the legal structure of the head-lease but does not itself change whether a sublease to an occupying tenant meets the IFRS 16 definition of a lease. [S6] KPMG's Nigeria-specific analysis at the time of the standard's introduction highlighted the balance-sheet impact for Nigerian lessees with material property and equipment leases, consistent with the wider transparency objective of the standard. [S4]

Tax interaction (Nigeria)

Rent payments to a resident landlord are generally subject to withholding tax at 10%, deducted by the tenant before remittance of the net amount, with the deduction available to the landlord as a tax credit; this WHT mechanism operates on the cash rent payment and is separate from the IFRS 16 depreciation and interest expense recognised by the lessee, which do not themselves attract withholding tax. [S5] Standard VAT at 7.5% may also apply to commercial lease/rental charges depending on the nature of the property and the parties involved, and should be confirmed for each arrangement rather than assumed. [S_TAX1] For tax purposes, deductibility of lease-related costs (rent, or the interest/notional finance element of a recognised lease liability) follows the applicable tax rules under the Nigeria Tax Act 2025 rather than automatically mirroring the IFRS 16 depreciation and interest split. [S_TAX2] Nigerian rates, thresholds, exemptions, incentives and filing rules referenced in this file (including CIT, VAT, withholding tax categories and rates, and the small-company threshold) should be independently verified against the Nigeria Tax Act 2025, the Nigeria Tax Administration Act 2025, the Deduction of Tax at Source (Withholding) Regulations, and current NRS practice in force at the reporting or filing date, since thresholds, rates and reliefs are subject to periodic revision and to sector- or entity-specific qualifying conditions. This file does not constitute legal or tax advice. [S_TAX1][S_TAX2]

FX considerations

Where a Nigerian entity leases property or equipment under a contract denominated in, or indexed to, a foreign currency (common for imported equipment leases or certain prime commercial property arrangements priced with reference to US dollar values), the lease liability is a monetary item retranslated at the closing rate each period under IAS 21, and naira volatility can drive material period-on-period exchange gains or losses on the lease liability that are unrelated to the underlying right-of-use asset's depreciation charge.

SME practical note

Nigerian SMEs frequently treat property leases as simple rent expense without recognising a right-of-use asset and lease liability at all, particularly where leases are informal, short-dated on paper but renewed indefinitely in practice, or documented only by a tenancy agreement rather than a full lease deed; Outliers recommends reviewing the actual practice of renewal (not just the paper term) when assessing lease term and exemption eligibility for such clients.

Common Nigerian pitfalls

  • Treating a property lease that is renewed indefinitely in practice as a short-term lease based only on the stated paper term.
  • Applying an arbitrary discount rate (e.g. the CBN Monetary Policy Rate unadjusted) instead of deriving a lessee-specific incremental borrowing rate.
  • Failing to net WHT correctly — recognising rent expense net of withholding tax instead of gross, with a separate WHT credit receivable.
  • Not distinguishing VAT charged on lease/rental payments (where applicable) from the lease payment itself when measuring the lease liability, which should exclude recoverable VAT.

FRC pronouncements

No FRCN pronouncement specific to lease accounting under IFRS 16 has been identified; the relevant FRCN context is its overarching mandate to promote IFRS compliance. [S3]

Worked examples

Initial recognition of an office lease

A Nigerian company enters a 5-year lease for office space, with annual payments of ₦20,000,000 payable in arrears, no renewal or purchase options, and no initial direct costs or lease incentives. The rate implicit in the lease is not readily determinable; the lessee's incremental borrowing rate is 18% per annum.

Facts

Workings

Present value of 5 annual payments of 20,000,000 at 18%: using the present value of an ordinary annuity factor for 5 years at 18% (approximately 3.1272), lease liability ≈ 20,000,000 x 3.1272 ≈ 62,544,000 (rounded for illustration).

Right-of-use asset at initial recognition = initial lease liability (no initial direct costs or prepayments) = 62,544,000.

Journal entries

Recognise the right-of-use asset and lease liability at commencement of the office lease.

AccountDr (₦)Cr (₦)
Right-of-use asset – office property62,544,000
Lease liability62,544,000

Year 1 depreciation, interest and rent payment with withholding tax

Continuing the office lease above (right-of-use asset and lease liability both initially ₦62,544,000, 5-year term, 18% incremental borrowing rate), at the end of year 1 the company pays the annual rent of ₦20,000,000 to the landlord, who is a resident individual; the company deducts 10% withholding tax on rent before remitting the net amount.

Facts

Workings

Depreciation expense: 62,544,000 / 5 = 12,508,800

Interest expense (unwinding of discount): 62,544,000 x 18% = 11,257,920

Lease liability after interest accrual: 62,544,000 + 11,257,920 = 73,801,920

Lease liability after the 20,000,000 payment: 73,801,920 - 20,000,000 = 53,801,920

Withholding tax withheld from the landlord is remitted by the company to the tax authority on the landlord's behalf and is not an expense of the lessee company.

Journal entries

Recognise year 1 depreciation of the right-of-use asset.

AccountDr (₦)Cr (₦)
Depreciation expense (profit or loss)12,508,800
Accumulated depreciation – right-of-use asset12,508,800

Recognise interest expense on the lease liability for year 1 (unwinding of the discount).

AccountDr (₦)Cr (₦)
Interest expense (finance cost)11,257,920
Lease liability11,257,920

Recognise the year 1 rent payment, split between the net cash paid to the landlord and the withholding tax remitted to the tax authority on the landlord's behalf.

AccountDr (₦)Cr (₦)
Lease liability20,000,000
Cash (paid to landlord)18,000,000
Withholding tax payable (remitted to tax authority)2,000,000

Sources & citations

  1. [S1]IFRS 16 Leases — IFRS Foundationaccessed 2026-07-18
  2. [S2]IFRS 16, Leases — ACCA Globalaccessed 2026-07-18
  3. [S3]IFRS - Use of IFRS Standards by jurisdiction: Nigeria — IFRS Foundationaccessed 2026-07-18
  4. [S4]IFRS 16: Leases – A Step Towards a More Transparent Balance Sheet — KPMG Nigeriaaccessed 2026-07-18
  5. [S5]Nigeria - Corporate - Withholding taxes — PwC Worldwide Tax Summariesaccessed 2026-07-18
  6. [S6]Procedure For Certificate Of Occupancy In Nigeria — Mondaqaccessed 2026-07-18
  7. [S_TAX1]Nigeria - New Legislation Includes Important Changes to VAT Rules — BDO Globalaccessed 2026-07-18
  8. [S_TAX2]Nigeria Tax Act, 2025 has been signed – highlights — EY Globalaccessed 2026-07-18
Last reviewed 2026-07-18 · Reviewer: Rafiu Olawuyi, FCA (Author / Technical Reviewer)