Lease Terms
IFRS 16 Lease Audit Working Paper Template & Checklist — free PDF
Quick reference card, IBR documentation template, lease assessment flowchart, and audit working paper template. Plus one practical audit insight per week.
No spam. Unsubscribe anytime.
IFRS 16.26 — At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date.
IFRS 16.23–24 — At the commencement date, a lessee shall measure the right-of-use asset at cost.
ISA 500 — Sufficient appropriate audit evidence for the lease liability as independent audit evidence.
ISA 540 — Auditing accounting estimates — applies to the IBR determination and lease term judgment.
IFRS 16 in Australia — AASB 16 Leases
Australia adopted IFRS 16 as AASB 16 Leases, effective for annual periods beginning on or after 1 January 2019. AASB 16 is substantively identical to IFRS 16 with Australian-specific paragraphs (prefixed 'Aus') addressing not-for-profit and public sector entities. The Australian Securities and Investments Commission (ASIC) monitors compliance with accounting standards for reporting entities. The Australian Auditing and Assurance Standards Board (AUASB) sets auditing standards based on ISA with Australian additions.
Regulatory Context — Australian Securities and Investments Commission (ASIC) / Australian Auditing and Assurance Standards Board (AUASB)
ASIC has included AASB 16 in its focus areas for financial report surveillance. Key ASIC observations include: the importance of entity-specific IBR determination rather than using a single group rate, adequate disclosure of lease term judgments for extension and termination options, and the need for clear quantitative information about the IFRS 16 impact on financial ratios and covenants. ASIC has also focused on the completeness of lease identification, particularly for embedded leases in service agreements.
Practical Guidance for Australia
For Australian entities, the IBR should reference Australian market conditions — Australian Government Bond (AGB) yields for the risk-free component, plus entity-specific credit spreads derived from the entity's actual borrowing costs. For commercial property leases in Australia, lease terms and conditions are governed by state-based retail leasing legislation (e.g., Retail Leases Act 2003 (Vic), Retail Leases Act 1994 (NSW)) for retail premises, and common law principles for commercial and industrial leases. State-based legislation may provide renewal rights or compensation for goodwill, affecting the IFRS 16 lease term assessment.
Audit Expectations
Australian auditors follow ASA (Australian Auditing Standards), which incorporate ISA with limited modifications. The AUASB and professional bodies (CA ANZ, CPA Australia) have issued guidance on auditing AASB 16 estimates. ASIC's audit inspection findings have highlighted instances where auditors insufficiently challenged management's IBR methodology and lease term assessments.
Australia-Specific Considerations
Australia-specific considerations include the interaction between AASB 16 and the Australian tax system. For tax purposes, operating lease payments are generally deductible under Section 8-1 of the Income Tax Assessment Act 1997. AASB 16 does not change the tax treatment — the deduction continues based on lease payments made, not the IFRS 16 depreciation and interest amounts. For not-for-profit entities reporting under AASB 16, the Australian-specific paragraphs (Aus paragraphs) provide additional guidance on below-market leases (concessionary leases), requiring fair value measurement with the below-market benefit recognised as income.
Common Inspection Findings
Group IBR applied without subsidiary-specific adjustment for Australian operations
Retail leasing legislation not considered in lease term assessments
Concessionary lease requirements for NFP entities not consistently applied
Embedded leases in managed service agreements not identified
Disclosure of IBR methodology and key judgments deemed insufficient by ASIC