Why do companies struggle with IFRS16 compliance?

Meeting IFRS16 compliance requirements presents significant challenges for organizations due to the standard’s complexity, extensive documentation demands, and resource-intensive calculations. Companies often lack specialized expertise, struggle with accurate lease identification, and face technical difficulties when relying on manual processes or inadequate systems. The standard’s impact on financial statements creates additional pressure for finance teams to ensure precision while navigating the ongoing maintenance requirements.

Why do companies struggle with IFRS16 compliance?

The road to IFRS16 compliance resembles an obstacle course designed by accountants with a twisted sense of humor. The standard requires companies to recognize nearly all leases on their balance sheets—a seemingly simple concept that quickly becomes a nightmare of complexity. Most organizations find themselves unprepared for the sheer volume of data collection, classification decisions, and detailed calculations required.

Resource constraints often compound these challenges. Many finance teams are already stretched thin with regular reporting duties, and IFRS16 demands specialized knowledge that may not exist in-house. The standard also introduces significant technological hurdles, as spreadsheet-based approaches quickly become unmanageable amid contract modifications, reassessments, and impairment calculations.

What is IFRS16 and why is it so complicated?

Imagine you’re borrowing your neighbor’s lawnmower for the summer. Under the old rules, you could simply wave at your neighbor occasionally and nobody would know you’ve essentially acquired an asset. IFRS16 says: “Not so fast! That lawnmower needs to go on your books as if you bought it and took out a loan to pay for it.” That’s essentially what IFRS16 does to company balance sheets—it forces them to recognize lease liabilities and corresponding right-of-use assets.

The complexity arises when you start dealing with real-world lease scenarios. Is that five-year office lease actually a ten-year lease because of those renewal options you’re “reasonably certain” to exercise? What’s the appropriate discount rate? And what about those variable payments based on sales performance? Suddenly, the accounting department needs to become mind readers predicting future business decisions while simultaneously performing complex present value calculations.

How does IFRS16 affect company financial statements?

IFRS16 hits financial statements like a tornado, reorganizing numbers in ways that can dramatically alter stakeholder perceptions. On the balance sheet, previously invisible lease obligations now appear as liabilities, sometimes increasing debt by staggering percentages. Right-of-use assets also materialize, changing asset compositions and key ratios like debt-to-equity.

The income statement feels the impact too, as the traditional straight-line lease expense splits into depreciation and interest components. This front-loading effect typically means higher expenses in early years of a lease compared to the old standards. EBITDA often improves because lease expenses move below the line, but cash flow statements require recategorization, with payments shifting partially from operating to financing activities.

For real-world perspective, consider retailers with numerous store leases or airlines with aircraft leases—their balance sheets can expand dramatically overnight, potentially affecting loan covenants and investor confidence.

What are the most common IFRS16 implementation mistakes?

Let’s talk about implementation blunders that would make even seasoned accountants cringe. The “it’s just a rental” syndrome tops our list—where companies miss leases embedded in service contracts or misclassify arrangements containing lease components. We’ve witnessed organizations discover hundreds of additional leases lurking in unexpected departments months after their “complete” implementation.

Discount rate determination ranks as another favorite fiasco. One multinational company we know applied a single global rate to all leases, completely ignoring country-specific economic differences—an approach their auditors rejected faster than you can say “material misstatement.”

Many companies also underestimate the system requirements for ongoing compliance. The “spreadsheet heroes” who manage initial calculations often find themselves drowning in complexity when lease modifications, reassessments, and impairments enter the picture. What began as a manageable process quickly resembles trying to perform brain surgery with kitchen utensils—technically possible but not recommended.

How can technology solve IFRS16 compliance challenges?

Purpose-built technology transforms IFRS16 compliance from a headache-inducing puzzle into a manageable process. Specialized software solutions offer structured data capture ensuring all critical lease information is properly documented. The right system handles complex calculations automatically—from initial recognition through modifications, reassessments, and impairment testing.

Our Frame solution addresses these challenges through centralized contract management and automated IFRS16 calculations. With proper technology, companies can redirect finance staff from mind-numbing spreadsheet maintenance to valuable analysis and decision support. The difference is remarkable: what once required days of work for monthly close can be accomplished in hours with dramatically improved accuracy.

Technology also provides audit-ready documentation and reporting capabilities that streamline verification processes. When auditors request support for amounts recognized, companies with proper systems can instantly generate the documentation rather than scrambling through scattered files and calculations.

IFRS16 Compliance: Essential Action Steps for Your Company

Taking control of your IFRS16 compliance journey requires a methodical approach. Begin by assessing your current lease portfolio and tracking systems—most companies discover they have more leases and greater complexity than initially estimated. Establish a cross-functional team including accounting, procurement, legal, and IT to ensure comprehensive identification and appropriate policy decisions.

Evaluate your technology requirements realistically. For organizations with more than a handful of leases, dedicated lease accounting software provides significant advantages over spreadsheet approaches. When selecting systems, prioritize solutions designed specifically for IFRS16 rather than general-purpose tools with limited lease functionality.

We recommend creating a detailed implementation timeline that includes data collection, system configuration, testing, and transition accounting. Allow sufficient time for validation and audit preparation before your compliance deadline. Consider partnering with specialists who understand both the accounting requirements and technological solutions—the right expertise can dramatically accelerate your implementation and reduce costly mistakes.