The Step-by-Step Approach to Meeting IFRS 16 Requirements Effectively

For publicly listed companies and corporations operating within the European Union, IFRS 16 compliance represents a significant accounting challenge that impacts financial reporting processes. Navigating these requirements effectively requires a methodical approach and the right tools. Without proper systems in place, organisations face increased risk of reporting errors, audit complications, and inefficient use of financial resources. This guide outlines a practical, step-by-step methodology for meeting IFRS 16 requirements, helping your organisation transform what might seem like a regulatory burden into an opportunity for improved lease management and financial transparency.

Understanding IFRS 16 key requirements and implications

IFRS 16 fundamentally changes how leases are recognised on financial statements. Unlike its predecessor IAS 17, which distinguished between finance and operating leases, IFRS 16 requires nearly all leases to appear on the balance sheet. Under this standard, organisations must recognise a right-of-use asset and corresponding lease liability for each qualifying lease arrangement.

The core principle behind IFRS 16 is to ensure greater transparency by revealing previously off-balance sheet lease obligations. For EU companies, this means recording lease assets and liabilities at present value, calculating appropriate depreciation of lease assets, and recognising interest expenses related to lease liabilities.

Disclosure requirements have also expanded substantially. Companies must now provide detailed information about their lease activities, including expense breakdowns, future lease commitments, and any significant judgements applied in determining lease terms or discount rates.

What challenges do companies face with IFRS 16 compliance?

The transition to IFRS 16 presents several substantial hurdles for organisations:

• Data collection and management – Gathering complete information across potentially hundreds or thousands of lease contracts scattered throughout an organisation
• Identifying embedded leases within service contracts that might not be obviously designated as leases
• Determining appropriate discount rates that reflect company-specific borrowing terms
• Calculating complex modifications when lease terms change
• Maintaining accurate tracking of lease portfolios on an ongoing basis

Many organisations initially attempted to manage these requirements using spreadsheets, quickly discovering that manual processes become unwieldy and error-prone, particularly when handling lease modifications or reassessments. The complexity of calculations and volume of data points make spreadsheet-based solutions increasingly risky as lease portfolios grow.

Step-by-step implementation roadmap for IFRS 16

Implementing an effective IFRS 16 compliance programme involves these critical steps:

1. Assess your lease portfolio – Conduct a comprehensive inventory of all leases across the organisation, including those potentially embedded within service agreements
2. Collect and validate lease data – Gather key information including lease terms, payment schedules, termination options, and extension provisions
3. Determine your accounting policies – Establish consistent approaches for discount rates, lease terms, and practical expedients
4. Implement appropriate technology – Select and configure lease accounting software that supports compliance requirements
5. Calculate initial measurements – Determine right-of-use assets and lease liabilities for each contract
6. Establish ongoing processes – Create procedures for regular reviews, modifications, and reassessments
7. Prepare compliant disclosures – Develop templates and processes for financial statement presentations

Throughout implementation, documentation is essential. Maintaining clear audit trails of decisions, calculations, and processes helps ensure defensible compliance that satisfies both internal and external auditors.

Technology solutions for streamlining IFRS 16 reporting

Purpose-built lease accounting software offers significant advantages over manual approaches:

• Automated calculations for complex present value determinations and amortisation schedules
• Centralised data repository for all lease information
• Built-in validation checks to identify potential errors or inconsistencies
• Scenario planning capabilities for evaluating potential lease modifications
• Audit trails documenting all changes and calculations
• Standardised reporting templates aligned with disclosure requirements

The right technology solution transforms IFRS 16 compliance from a resource-intensive burden into a streamlined process, freeing finance teams to focus on analysis rather than calculation. With automation, companies can significantly reduce the risk of errors while improving the efficiency of their reporting cycles.

How Frame software addresses complex lease management

Our Frame IFRS 16 Lease Management application provides a comprehensive solution for organisations navigating compliance challenges. Designed specifically for EU companies reporting under IFRS standards, Frame offers specialised capabilities that transform lease reporting processes:

• Intuitive contract data entry interfaces that capture all information necessary for compliance
• Automated calculation engines that handle complex present value determinations and generate appropriate journal entries
• Flexible reporting tools that produce both management information and formal financial disclosures
• Structured processes for handling lease modifications, reassessments, and impairments
• Secure, centralised storage for all lease documentation and calculation histories

Frame particularly excels in environments with high volumes of leases, providing the scalability needed for large organisations while maintaining the accuracy essential for audit-ready reporting. By automating complex calculations while allowing for manual data input and review, we’ve created a balanced solution that combines efficiency with appropriate controls.

Measuring success: KPIs for effective IFRS 16 management

Evaluating the effectiveness of your IFRS 16 implementation should incorporate these key performance indicators:

• Reporting accuracy – Measured by the number and significance of adjustments required during reviews and audits
• Processing efficiency – Time required to complete monthly and quarterly lease accounting cycles
• Audit readiness – Ability to provide supporting documentation and explanations for all calculations
• Financial visibility – Clarity of reporting that enables meaningful analysis of lease portfolio impacts
• Resource allocation – Reduced staff time dedicated to routine calculations and increased focus on analysis

Effective implementation should ultimately deliver more than just compliance – it should provide enhanced visibility into your organisation’s lease commitments, enabling better decision-making around lease versus buy decisions and contract negotiations.

By approaching IFRS 16 implementation methodically with the right tools and processes, organisations can transform a regulatory requirement into a valuable financial management capability. Our Frame application supports this journey by automating complex calculations while maintaining the flexibility needed to address unique organisational requirements.