IFRS 16 · Retail

IFRS 16 Lease Calculator
for Retail

Pre-configured for retail entities with extensive store networks, percentage-rent considerations, and CPI escalation clauses. Accounts for the disproportionate balance sheet impact of IFRS 16 on retail operations.

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 Retail — Practical Guidance

IFRS 16 has a more significant impact on retail entities than almost any other industry. Retailers typically operate extensive store networks under operating leases, and the transition to on-balance-sheet recognition under IFRS 16 has materially increased both total assets and total liabilities. For large retail chains, aggregate lease liabilities can represent billions in newly recognised obligations, fundamentally changing key financial ratios including gearing, return on assets, and EBITDA.

Measurement Considerations for Retail

Retail store leases present unique complexities under IFRS 16. Many leases include variable rent components tied to store revenue (percentage-rent or turnover-rent clauses). Under IFRS 16.27, only fixed payments and variable payments linked to an index or rate are included in the lease liability measurement. Variable payments based on sales performance are excluded from the lease liability and recognised in profit or loss as incurred (IFRS 16.38(b)). This means a lease with base rent of €5,000 plus 3% of revenue above €200,000 would only include the €5,000 base rent in the lease liability calculation.

ROU Asset Depreciation for Retail

For retail entities, lease term determination requires careful judgment. Many store leases include extension options and break clauses. Under IFRS 16.18–19, the lease term includes optional periods if the lessee is reasonably certain to exercise extension options or not exercise termination options. Factors indicating reasonable certainty include significant leasehold improvements, the importance of the location to the retail network, costs of relocation, and historical lease renewal patterns. The assessment directly impacts the lease liability and ROU asset — a 10-year lease with a 5-year extension option, if extension is reasonably certain, would be measured as a 15-year lease.

Industry-Specific Considerations

Retail entities frequently face lease modifications as they optimise store portfolios — renegotiating rent, extending or shortening lease terms, or adding/removing leased space. IFRS 16.44–46 requires distinguishing between modifications that are separate leases (adding right to use additional space at standalone price) and modifications that are not separate leases. Non-separate modifications require remeasurement of the lease liability using a revised discount rate, with the adjustment recognised against the ROU asset. For retailers undergoing significant portfolio restructuring, this creates substantial accounting complexity.

Worked Example: 10-Year High Street Store Lease with CPI Escalation

A retailer leases a high street store for 10 years commencing 1 April 2025. Monthly rent is €8,500 payable in arrears with annual CPI-linked escalation of 2.5% (applied at each anniversary). The retailer's IBR is 4.0%. The retailer has incurred €25,000 in legal fees as initial direct costs. There is a restoration obligation estimated at €35,000 to remove store fit-out at lease end.

Initial Liability
€927,411
Initial ROU Asset
€987,411
Total Interest
€222,121
Total Payments
€1,149,532

Audit Considerations

Retail lease portfolios create significant audit complexity under ISA 540 (Revised) due to the volume of estimates involved — IBR determination, lease term assessments, and variable payment classifications. Auditors should consider whether the entity's IFRS 16 lease management system provides adequate controls and whether the portfolio approach to IBR determination is reasonable.

Frequently Asked Questions — Retail

How do I treat percentage-rent (turnover-rent) clauses under IFRS 16?
Variable lease payments that depend on sales or usage are excluded from the lease liability measurement (IFRS 16.27). Only the fixed base rent component is included. Variable rent based on turnover is recognised as an expense in profit or loss in the period in which the condition that triggers the payment occurs (IFRS 16.38(b)). However, if the variable rent is linked to an index (such as CPI), the initial measurement uses the index rate at commencement, and the liability is remeasured when payments change due to index movements.
Should I include extension options in my retail lease term?
Include extension periods if you are reasonably certain to exercise the option (IFRS 16.18). Consider: significant leasehold improvements not yet depreciated, the location's strategic importance, relocation costs, historical renewal patterns, and the availability of suitable alternatives. For flagship stores with substantial fit-out investment, reasonable certainty of extension is common. For secondary locations, evaluate each lease individually based on store performance and network strategy.
How does IFRS 16 affect retail EBITDA and key financial ratios?
IFRS 16 replaces operating lease expense (previously within EBITDA) with depreciation and interest expense (both below EBITDA). This typically increases reported EBITDA significantly for retailers. However, debt covenants may need renegotiation as total liabilities increase materially. Gearing ratios, return on assets, and current ratios are all affected. Many retail analysts now focus on pre-IFRS 16 metrics or adjust for lease impact when comparing across periods.
How do I handle COVID-era rent concessions for retail leases?
The IASB issued amendments providing a practical expedient for COVID-19-related rent concessions (and extended for concessions reducing payments due on or before 30 June 2022). If the practical expedient is applied, the lessee does not assess whether the concession is a lease modification and recognises the change in payments directly in profit or loss. For concessions outside this scope, apply the standard modification accounting in IFRS 16.44–46.
What discount rate should I use for a portfolio of retail store leases?
IFRS 16 requires an entity-specific IBR for each lease, but paragraph BC161 acknowledges that a portfolio approach may be acceptable where leases share similar characteristics. For retail portfolios, group leases by currency, jurisdiction, term band, and collateral type. A common approach is to derive a base IBR from the entity's secured borrowing rate, then adjust for lease term using a yield curve. Document the methodology thoroughly for audit purposes.

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