IFRS 16 Requirements Explained: 7 Essential Compliance Steps for 2025

As 2025 approaches, companies across the European Union are facing increasing scrutiny regarding their IFRS 16 compliance. This lease accounting standard, which fundamentally changed how organisations report lease assets and liabilities, continues to evolve with regulatory expectations becoming more stringent. For finance professionals, staying ahead of these requirements isn’t just about ticking boxes—it’s about ensuring financial transparency and avoiding potentially costly compliance issues. This guide explores seven essential steps to help your organisation navigate IFRS 16 requirements with confidence in 2025 and beyond.

What is IFRS 16 and why it matters in 2025

IFRS 16 is the international financial reporting standard that governs how companies account for leases on their balance sheets. Introduced to replace the previous IAS 17 standard, IFRS 16 eliminated the distinction between operating and finance leases for lessees, requiring virtually all leases to be recognised on the balance sheet. This creates greater transparency by revealing previously off-balance sheet lease obligations.

As we approach 2025, IFRS 16 has become increasingly important for several reasons. Regulatory bodies are enhancing enforcement and scrutiny of financial reporting. Investors and stakeholders are demanding greater transparency around lease obligations. Additionally, companies with robust IFRS 16 processes gain valuable insights into their lease portfolios, enabling better decision-making and cost control.

For EU companies especially, compliance is non-negotiable. The standard affects everything from key financial ratios to covenant compliance and credit ratings, making proper implementation essential for publicly listed companies and other organisations reporting under IFRS standards.

Key challenges in IFRS 16 compliance

Despite several years of implementation, many organisations still struggle with various aspects of IFRS 16 compliance. The most significant challenges include:

• Data collection complexities – Gathering complete and accurate information from numerous lease contracts scattered across departments and locations
• Determining appropriate discount rates that accurately reflect the company’s incremental borrowing costs
• Managing lease modifications and reassessments when contract terms change
• Maintaining ongoing compliance amid evolving lease portfolios and regulatory expectations
• Producing comprehensive disclosures that satisfy auditor requirements and provide transparency

These challenges are particularly acute for organisations managing large lease portfolios across multiple locations, currencies, and asset types. Manual processes and spreadsheets often prove inadequate for the complexity involved, leading to errors and compliance gaps.

Identify and categorize all leases

The foundation of IFRS 16 compliance begins with a comprehensive inventory of all lease agreements across your organisation. This critical first step requires collaboration between finance, procurement, operations, and IT departments to ensure no lease arrangements are overlooked.

Begin by establishing clear criteria for identifying leases based on the IFRS 16 definition – contracts that convey the right to control the use of an identified asset for a period in exchange for consideration. Don’t forget to examine service contracts, which may contain embedded lease components that require separate accounting treatment.

Once identified, categorize leases by asset type (property, equipment, vehicles, etc.), department, location, and lease term. This structured approach enables more efficient management and ensures appropriate accounting treatment based on the specific characteristics of each lease arrangement.

Calculate lease liabilities accurately

Accurate calculation of lease liabilities forms the cornerstone of IFRS 16 compliance. This step requires determining the present value of all future lease payments using the appropriate discount rate – typically the lessee’s incremental borrowing rate if the implicit rate in the lease cannot be readily determined.

When calculating lease liabilities, consider all contractual elements including:

• Fixed payments (including in-substance fixed payments)
• Variable payments that depend on an index or rate
• Expected payments under residual value guarantees
• Exercise price of purchase options reasonably certain to be exercised
• Penalties for termination if the lease term reflects exercising a termination option

The lease term determination requires particular attention, as it must reflect the non-cancellable period plus any extension periods reasonably certain to be exercised or termination options reasonably certain not to be exercised. This assessment involves significant judgment and should be documented thoroughly.

Recognize right-of-use assets

After calculating lease liabilities, the next step involves recognizing and measuring right-of-use assets on the balance sheet. Initially, the right-of-use asset is typically measured at an amount equal to the lease liability, adjusted for:

• Any lease payments made at or before the commencement date
• Initial direct costs incurred by the lessee
• Estimated costs for dismantling, removing, or restoring the underlying asset
• Less any lease incentives received

Subsequently, the right-of-use asset must be depreciated over the shorter of the lease term or the useful life of the underlying asset unless ownership transfers to the lessee or a purchase option is reasonably certain to be exercised. The right-of-use asset should also be assessed for impairment indicators periodically, following the requirements of IAS 36 Impairment of Assets.

Implement robust data management

Effective lease accounting under IFRS 16 demands robust data management processes. Our Frame IFRS 16 Lease Management application is specifically designed to address this challenge, providing a centralized system for managing all lease information accurately and efficiently.

A comprehensive lease data management system should:

• Maintain a complete repository of all lease contracts and related documentation
• Track critical dates including commencement, review periods, and expiration
• Support multi-currency management and conversion for international lease portfolios
• Include data validation controls to ensure accuracy and completeness
• Provide audit trails that document changes to lease data and calculations

With Frame, finance teams can efficiently manage lease data through a structured input process, ensuring all relevant information is captured for accurate compliance calculations and reporting while maintaining data integrity throughout the lease lifecycle.

Prepare compliant financial disclosures

IFRS 16 requires extensive disclosures that go beyond simply reporting right-of-use assets and lease liabilities on the balance sheet. These disclosures aim to provide financial statement users with insight into how leases affect an entity’s financial position, performance, and cash flows.

Key disclosure requirements include:

• Depreciation charge for right-of-use assets by class of underlying asset
• Interest expense on lease liabilities
• Expense relating to short-term leases and leases of low-value assets
• Total cash outflow for leases
• Additions to right-of-use assets
• Gains or losses arising from sale and leaseback transactions
• Carrying amount of right-of-use assets by class of underlying asset

Additionally, qualitative disclosures are required to explain the nature of leasing activities, potential exposure to future cash outflows, and significant judgments applied in implementing the standard.

Establish ongoing monitoring processes

IFRS 16 compliance isn’t a one-time exercise but requires continuous monitoring throughout the lease lifecycle. Establishing robust processes for ongoing compliance involves:

• Regular review of lease terms and conditions for modifications or changes
• Reassessment of lease terms when significant events or changes in circumstances occur
• Monitoring for impairment triggers that might affect right-of-use assets
• Adjusting calculations when changes in indices or rates affect variable lease payments
• Reviewing discount rates for new leases or significant modifications

The Frame application supports these ongoing requirements by providing automated alerts for critical lease events and facilitating the documentation of reassessments and modifications to maintain compliance over time.

Leverage technology for compliance efficiency

The final step in achieving and maintaining IFRS 16 compliance involves leveraging purpose-built technology solutions. Manual spreadsheets are increasingly inadequate for the complexity and volume of calculations required, especially as lease portfolios grow and regulatory scrutiny intensifies.

Our Frame IFRS 16 Lease Management application provides a comprehensive solution that streamlines compliance by:

• Automating complex calculations for lease liabilities and right-of-use assets
• Generating journal entries for initial recognition and subsequent measurement
• Producing disclosure reports that satisfy auditor requirements
• Providing scenario analysis capabilities for business planning
• Maintaining a secure, auditable record of all lease data and calculations

By implementing specialized lease management software like Frame, organizations can not only ensure compliance but also transform lease management from a burdensome compliance exercise into a source of strategic financial insight.

As regulatory expectations continue to evolve, having the right technology partner becomes increasingly important for maintaining IFRS 16 compliance while optimizing your lease portfolio management. Our solution is designed specifically for EU companies reporting under IFRS standards, ensuring you stay compliant while gaining greater control and visibility over your lease obligations.