Is Your Company Required to Comply with IFRS 16? The Ultimate Assessment Guide

Navigating the complex world of international financial reporting standards can be daunting for any organisation. If your company manages leases, you’ve likely heard about IFRS 16 – the lease accounting standard that has transformed how businesses report their lease assets and liabilities on balance sheets. But does your company actually need to comply? This question isn’t always straightforward, and the implications of getting it wrong can be significant.

For EU-based companies and publicly listed entities, understanding your obligations under IFRS 16 isn’t just good practice—it’s essential for proper financial governance. This guide will help you determine whether your organisation falls under IFRS 16 requirements and outline the practical steps you need to take for assessment and compliance.

Understanding IFRS 16 scope and applicability

IFRS 16 applies to a specific range of organisations, primarily those reporting under International Financial Reporting Standards. The standard became effective for annual reporting periods beginning on or after 1 January 2019, representing a significant shift in lease accounting compliance.

You are likely subject to IFRS 16 if your organisation:

• Is a publicly listed company within the European Union
• Is required to prepare consolidated financial statements under EU regulations
• Voluntarily reports using IFRS standards
• Is a subsidiary of a parent company that reports under IFRS

The standard applies to virtually all lease contracts, with only limited exceptions for short-term leases (less than 12 months) and low-value assets. This means most significant leases—from property and vehicles to equipment and technology—must be accounted for on your balance sheet.

Key indicators your organisation needs compliance

Beyond the basic applicability criteria, several specific indicators suggest your organisation needs to implement IFRS 16 compliance measures:

• Lease portfolio size: If your company maintains multiple lease agreements or high-value leases, compliance becomes increasingly critical as the potential balance sheet impact grows
• Financial reporting framework: Companies transitioning to IFRS reporting for any reason must incorporate IFRS 16 requirements
• International operations: Organisations with cross-border activities often find that IFRS 16 compliance simplifies their consolidated reporting
• Investor and stakeholder expectations: Even when not strictly required, stakeholders increasingly expect IFRS 16 adoption as a mark of financial transparency

Remember that IFRS 16 requirements extend beyond mere compliance—they represent a fundamental shift in how lease assets and liabilities are represented in your financial statements.

Common challenges in IFRS 16 assessment

Determining your compliance requirements can be complicated by several common obstacles:

Data fragmentation poses a significant challenge—lease information is often scattered across departments, making it difficult to build a comprehensive inventory. Many organisations struggle with identifying all their leases, particularly when embedded in service contracts or unusual arrangements.

Complex lease structures with variable payments, extension options, or modification clauses require sophisticated assessment approaches. Organisations with international operations face additional complexity when leases span multiple jurisdictions with varying local regulations.

Finance departments often find themselves under-resourced for proper IFRS 16 assessment, lacking both the specialized knowledge and technical infrastructure needed for compliance. Without dedicated lease management software, many teams resort to error-prone spreadsheets that become unmanageable as lease portfolios grow.

How to conduct an IFRS 16 readiness assessment

A methodical approach to IFRS 16 readiness involves several critical steps:

1. Complete a comprehensive lease inventory assessment, gathering all contracts that might qualify as leases under the standard
2. Categorise your leases according to type, value, and term to determine which fall within scope
3. Analyse the financial impact of bringing these leases onto your balance sheet
4. Evaluate your current accounting systems’ capabilities for IFRS 16 calculations
5. Assess staff knowledge and identify training requirements
6. Develop a detailed implementation roadmap with clear milestones

This assessment process helps identify gaps in your organisation’s preparedness and establishes the foundation for compliance. Document your findings thoroughly, as this information will guide your technology and resource decisions.

Technology solutions for IFRS 16 management

Specialised lease management software has become essential for efficient IFRS 16 compliance, particularly for organisations with substantial lease portfolios. Our Frame application offers a comprehensive solution designed specifically for companies dealing with high volumes of lease data.

Frame centralises all lease information in one secure location, creating a single source of truth for your entire lease portfolio. The application handles complex IFRS 16 calculations automatically, eliminating error-prone manual processes while ensuring consistent application of accounting principles.

The key advantages of using purpose-built technology like Frame include:

• Centralised lease data management that streamlines information collection and maintenance
• Automated calculations that significantly reduce the risk of human error
• Streamlined reporting capabilities that satisfy both internal management and external regulatory requirements
• Audit trail functionality that documents all lease changes and accounting decisions

While the standard requires manual input of contract information, Frame automates the complex calculations, dramatically reducing the resource burden on finance teams while improving accuracy.

What happens if you fail to comply?

Non-compliance with IFRS 16 carries several serious consequences that extend beyond mere regulatory issues:

Financial statements that don’t properly reflect lease obligations present an inaccurate picture of your organisation’s financial position. This misrepresentation can mislead investors and other stakeholders, potentially damaging your reputation for transparency and reliability.

Audit complications arise when lease accounting falls short of requirements, potentially resulting in qualified audit opinions or restatements. These issues can trigger additional scrutiny from regulators, especially for publicly listed companies subject to stock exchange oversight.

The most direct consequence is often the need for costly remediation efforts, including financial restatements and emergency compliance projects that typically cost significantly more than planned implementation would have.

Beyond these immediate concerns, non-compliance can erode investor confidence and create governance concerns at the board level. For organisations seeking financing, inaccurate financial statements may affect credit ratings and borrowing costs.

Understanding your obligations under IFRS 16 isn’t optional—it’s a fundamental aspect of proper financial governance in today’s regulatory environment. By assessing your requirements early and implementing appropriate systems like Frame, you can ensure compliance while minimising disruption to your organisation. Our lease management application is specifically designed to help EU-based companies navigate these complex requirements with confidence and efficiency.