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.
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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 Real Estate — Practical Guidance
Real estate and property companies encounter IFRS 16 from both the lessee and lessor perspective, but this calculator addresses the lessee side — typically ground leases, head leases, and leaseback arrangements. Ground leases are particularly significant for property developers and investors, often spanning 50–99 years with complex rent review mechanisms. The interaction between IFRS 16 and IAS 40 Investment Property creates accounting policy choices that materially affect reported assets and liabilities.
Measurement Considerations for Real Estate
For ground leases held by property entities, the lease term assessment under IFRS 16.18–19 is critical. Long ground leases (often 99 or 125 years in certain jurisdictions) with renewal options require careful assessment of reasonable certainty. The discount rate for ground leases should reflect the secured nature and extremely long duration — ground lease discount rates are typically lower than rates for office or equipment leases, reflecting the security of the underlying land. CPI-linked rent reviews are included in the lease liability at the current index rate, with remeasurement when the index changes.
ROU Asset Depreciation for Real Estate
Under IAS 40, investment property held under a lease was previously eligible for fair value model treatment. IFRS 16 now requires all leases to be recognised, but the ROU asset for a property lease may be classified as investment property if it meets the IAS 40 definition. If the fair value model is applied under IAS 40 to the ROU asset, the ROU asset is measured at fair value rather than depreciated cost — a key accounting policy choice for property entities.
Industry-Specific Considerations
Sale-and-leaseback transactions are common in real estate and create specific IFRS 16 challenges. IFRS 16.98–103 addresses sale-and-leaseback transactions, requiring first that the transfer qualifies as a sale under IFRS 15. If it qualifies, the seller-lessee recognises a ROU asset based on the proportion of the previous carrying amount retained, and a corresponding gain or loss only on the rights transferred. If the sale price exceeds fair value, the excess is treated as additional financing. These transactions require careful assessment and are a common area of audit focus.
Worked Example: 20-Year Ground Lease
A property developer holds a 20-year ground lease commencing 1 January 2025. Monthly ground rent is €25,000 payable in arrears with 2% annual escalation. The developer's IBR is 4.2%. No initial direct costs. There is a restoration obligation of €100,000 to reinstate the site at lease end.
Audit Considerations
For property entities, auditors should focus on the lease term determination for ground leases, the discount rate for long-duration leases, and the accounting for sale-and-leaseback transactions. The interaction between IFRS 16 and IAS 40 requires understanding of the entity's accounting policy choices and their impact on reported results.