Lease Terms
IFRS 16 Lease Audit Working Paper Template & Checklist — free PDF
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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 for Construction — Practical Guidance
Construction companies typically have high-volume, short-duration lease portfolios — tower cranes, excavators, temporary site offices, scaffolding, and specialist equipment that moves from project to project. The short-term lease exemption (IFRS 16.5(a)) for leases of 12 months or less is heavily used in construction, but entities must assess each lease individually and cannot assume all project equipment qualifies. The interaction between IFRS 16 and IFRS 15 contract accounting is critical — lease costs are part of contract costs that feed into percentage-of-completion revenue recognition.
Measurement Considerations for Construction
For construction equipment leased for specific projects, the lease term determination is the key judgment. A crane lease for a 24-month project with no renewal option is straightforward. But a lease with a 6-month initial term plus monthly renewals, where the entity expects to renew for the project duration, requires assessment under IFRS 16.18–19: is the entity reasonably certain to renew? If the equipment is essential to the project and relocation costs are high, reasonable certainty of renewal may extend the lease term beyond the initial contractual period.
ROU Asset Depreciation for Construction
Construction entities must consider how IFRS 16 costs flow through to contract accounting under IFRS 15. Depreciation of the ROU asset and interest on the lease liability are contract costs that are included in the measure of progress toward completion. If a crane is dedicated to a single contract, its IFRS 16 costs (depreciation plus interest) form part of that contract's cost base. If equipment is shared across contracts, the entity must allocate IFRS 16 costs systematically. This affects both revenue recognition timing and contract profitability assessment.
Industry-Specific Considerations
The short-term lease exemption is widely used in construction but requires careful application. A lease with a term of 12 months or less (including any extension options the lessee is reasonably certain to exercise) qualifies. However, if a scaffolding lease has a 3-month term but the project requires 18 months of scaffolding, and the entity intends to renew monthly, the enforceable period may extend beyond 12 months depending on the legal and economic environment. Construction entities should establish clear policies for assessing short-term lease qualification and apply them consistently.
Worked Example: 24-Month Tower Crane Lease
A construction company leases a tower crane for a 24-month building project commencing 1 March 2025. Monthly payments are €3,500 payable in arrears. The company's IBR is 5.5%. There are mobilisation and demobilisation costs of €12,000 treated as initial direct costs.
Audit Considerations
Construction entity auditors should focus on the interaction between IFRS 16 and IFRS 15, particularly how lease costs affect contract profitability and revenue recognition timing. The short-term lease exemption assessment requires documentation of the entity's policy and evidence supporting lease term determinations. ISA 540 considerations apply to lease term estimates.