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 Insurance — Practical Guidance
Insurance companies face a dual accounting and regulatory challenge with IFRS 16. The standard's requirement to recognise lease liabilities on the balance sheet interacts with both IFRS 17 Insurance Contracts and the Solvency II regulatory framework. For insurers, lease portfolios typically comprise head office premises, branch offices, and IT infrastructure. While individual lease liabilities may be modest relative to insurance contract liabilities, the aggregate impact on Solvency II own funds and the solvency capital requirement (SCR) can be meaningful for smaller insurers.
Measurement Considerations for Insurance
For insurance entities, the discount rate should reflect the insurer's incremental borrowing rate, which may differ from the risk-free rate used in IFRS 17 and Solvency II calculations. The IBR for an insurer typically reflects the entity's credit standing and the secured nature of the borrowing. For property leases, consider referencing mortgage rates adjusted for the insurer's credit profile. Under Solvency II, ROU assets are valued at fair value for the balance sheet, and the lease liability is a financial liability — both feed into the calculation of own funds.
ROU Asset Depreciation for Insurance
Insurance entities must consider whether ROU assets require separate Solvency II valuation. Under Article 75 of the Solvency II Directive, assets are valued at the amount for which they could be exchanged between knowledgeable willing parties in an arm's length transaction. For ROU assets representing office space, the Solvency II valuation may differ from the IFRS 16 carrying amount. EIOPA guidance suggests using a market-consistent valuation approach.
Industry-Specific Considerations
The IFRS 17 and IFRS 16 interaction is particularly relevant for insurance entities. While the standards operate independently, both affect the same balance sheet and P&L. IFRS 17 replaces insurance-specific revenue with an insurance service result, while IFRS 16 replaces operating lease expense with depreciation and interest. For internal management reporting and performance metrics, insurers need to clearly distinguish between insurance service results and financing activities including lease obligations.
Worked Example: 8-Year Insurance Head Office Lease
An insurance company leases its head office for 8 years commencing 1 July 2025. Monthly rent is €18,000 payable in arrears. The insurer determines an IBR of 3.5%. Initial direct costs total €20,000 and the restoration obligation is estimated at €60,000 to reinstate the premises.
Audit Considerations
Auditors of insurance entities should consider both ISA requirements and insurance-specific regulatory expectations. EIOPA peer reviews have highlighted inconsistencies in the Solvency II treatment of leases across jurisdictions. National supervisors may have issued specific guidance on the prudential treatment of IFRS 16 leases.