IFRS 16 · Energy & Utilities

IFRS 16 Lease Calculator
for Energy & Utilities

Pre-configured for energy and utility entities with infrastructure leases, power purchase agreements, pipeline access arrangements, and decommissioning obligations. Addresses regulated vs. unregulated segment considerations.

Lease Terms

If checked, ROU asset depreciates over useful life instead of lease term (IFRS 16.32)

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 Energy & Utilities — Practical Guidance

Energy and utility companies hold some of the most complex lease portfolios across any industry. Leases span power generation assets, transmission and distribution infrastructure, pipeline capacity, office premises, fleet vehicles, and land for renewable energy installations. The interaction between IFRS 16 and energy-specific standards — including IFRIC 4 (now replaced by IFRS 16's identification guidance), IFRIC 12 Service Concessions, and the decommissioning provisions of IAS 37 — creates significant accounting complexity. For regulated energy entities, the tariff-setting implications of IFRS 16 add a commercial dimension beyond pure financial reporting.

Measurement Considerations for Energy & Utilities

Power purchase agreements (PPAs), pipeline capacity agreements, and similar energy infrastructure contracts frequently require lease identification analysis under IFRS 16.9–11. A take-or-pay arrangement for pipeline capacity is a lease if the buyer has the right to control the use of an identified portion of pipeline. A PPA may contain a lease if it gives the buyer the right to substantially all the output of an identified power station. The IFRIC provided guidance (subsequently incorporated into IFRS 16 application guidance) on these assessments. The outcome determines whether the arrangement is on or off balance sheet.

ROU Asset Depreciation for Energy & Utilities

Energy infrastructure ROU assets are frequently associated with significant decommissioning and restoration obligations. For leased land used for wind farms, solar installations, or drilling operations, the lessee may have obligations to dismantle infrastructure and restore the land at lease end. These restoration costs are included in the initial ROU asset cost (IFRS 16.24(d)) and recognised as a provision under IAS 37. The provision is discounted and unwound over the lease term. Changes in the decommissioning estimate result in adjustments to both the provision and the ROU asset (IFRIC 1).

Industry-Specific Considerations

For regulated energy entities, the transition to IFRS 16 may affect the regulated asset base and tariff calculations. If the regulator uses IFRS-based financial statements to set tariffs, the shift from operating lease expense to depreciation and interest changes the cost profile. Entities should engage with their regulators on the tariff implications. For unregulated segments (energy trading, retail supply), the IFRS 16 impact is purely a financial reporting matter without direct commercial consequences.

Worked Example: 15-Year Wind Farm Land Lease

An energy company leases land for a wind farm installation for 15 years commencing 1 January 2025. Monthly lease payments are €45,000 payable in arrears with 2% annual escalation. The company's IBR is 4.5%. Decommissioning and site restoration is estimated at €2,500,000 at lease end. Initial direct costs (surveying, legal) total €35,000.

Initial Liability
€5,997,183
Initial ROU Asset
€8,532,183
Total Interest
€2,962,417
Total Payments
€8,959,600

Audit Considerations

Energy sector auditors should focus on lease identification for complex infrastructure arrangements and the measurement of decommissioning provisions. ISA 620 may require the auditor to use an expert for decommissioning estimates. The regulated vs. unregulated segment distinction affects materiality and risk assessment.

Frequently Asked Questions — Energy & Utilities

Does a power purchase agreement (PPA) contain a lease under IFRS 16?
It depends on whether the PPA provides the buyer with the right to control the use of an identified power generation asset. Key factors: does the contract relate to a specific facility (identified asset)? Does the buyer take substantially all output? Can the supplier substitute the facility? Does the buyer direct how the facility operates? A PPA with a dedicated solar farm where the buyer takes all output and directs dispatch is more likely to contain a lease than a financial PPA referencing market prices.
How do I handle decommissioning obligations for leased energy infrastructure?
Include the estimated decommissioning cost in the initial ROU asset cost (IFRS 16.24(d)) and recognise a corresponding provision under IAS 37. Discount the provision to present value using a pre-tax rate reflecting current market assessments. Unwind the provision over the lease term. Changes in the decommissioning estimate are reflected as adjustments to both the provision and ROU asset (IFRIC 1). For offshore installations, decommissioning estimates can be tens of millions.
Does IFRS 16 apply to pipeline capacity agreements?
Apply the lease identification criteria in IFRS 16.9. If the agreement provides the buyer with the right to use a specific physical portion of pipeline (e.g., a dedicated pipeline or identified capacity within a shared pipeline), and the buyer controls that use, a lease exists. If the supplier can fulfil the contract using any pipeline in its network (substantive substitution right), it is a service arrangement. Assess each contract individually.
How does IFRS 16 interact with regulated tariff-setting?
For regulated entities, IFRS 16 changes the expense profile from straight-line operating lease expense to front-loaded total expense (depreciation plus interest). If the regulator uses IFRS financial statements to set tariffs, this may affect allowable costs and recovery timing. Engage with the regulator to determine whether IFRS 16 adjustments are required in the regulatory cost base.
Should I separate the land lease from the surface infrastructure lease for a solar/wind farm?
Typically, the land lease and the right to install and operate generation equipment are a single lease component because they are interrelated and the lessee would not benefit from one without the other. However, if the lease also covers adjacent land for different purposes (e.g., agricultural use), that may be a separate lease component requiring allocation of lease payments.

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