Implementing lease accounting standard IFRS 16 has reshaped how organisations record and manage leases. While the intent behind the standard is to improve transparency and consistency, many teams continue to struggle with its practical application. Nonetheless, errors often arise from the complexity of identifying, measuring, and tracking lease data, particularly when legacy systems or spreadsheets are still in use.
From misjudging lease terms to using outdated discount rates, even the smallest oversight can have significant financial consequences.
Below are the ten most common mistakes seen in IFRS 16 reporting and further discussed practical ways to prevent and avoid them.
1. Inaccurate Determination of the Lease Term
One of the most frequent errors occurs when organisations misjudge the lease term. These sorts of mistakes often happen with overlooking renewal, termination, and purchase options. For example, a property lease that automatically rolls over may seem straightforward, but if there is an economic incentive to renew, the renewal should be included in the lease term prior to it rolling over.
How to avoid this:
- Review all clauses related to renewals, terminations, and purchase options.
- Document assumptions and justifications for lease term decisions.
- Use a dedicated lease accounting system like Nomos One to automate calculations and maintain consistent records.
2. Applying the Wrong Discount Rate
Discount rates play a crucial role in lease reporting, to reflect that leasing is a financing arrangement and choosing an appropriate discount rate is a common challenge. Some companies use a rate that does not reflect their incremental borrowing cost, or they forget to update rate tables when market conditions change. This leads to incorrect measurement of interest and depreciation expenses.
How to avoid this:
- Regularly review discount rates to ensure they reflect current borrowing conditions.
- Document how the incremental borrowing rate was determined.
- Seek expert input for industry specific data or complex leases.
3. Mishandling Lease Modifications
Lease modifications can occur for various reasons – rent changes, term extensions, or alterations to leased space. The mistake lies in not reassessing the lease liability and right-of-use asset when these changes occur. Some organisations treat them as entirely new leases, while others fail to adjust them at all.
How to avoid this:
- Establish a formal process for identifying and approving modifications.
- Remeasure lease liabilities and right-of-use assets in line with the standard requirements.
- Leverage software like Nomos One to automate remeasurements and maintain complete lease disclosures.
4. Poor Coordination Across Departments
A lack of coordination between finance, property, legal, and operations teams often results in incomplete and inefficient lease management and lease reporting. When updates go unshared, critical modifications or renewals may be missed, compromising IFRS 16 compliance.
How to avoid this:
- Encourage collaboration through shared tools and consistent workflows.
- Centralise all lease data in a single, accessible platform.
- Automate notifications for key lease events, renewals, and expirations.
5. Miscalculating Forecasted Changes to Lease Payments
Variation in payments linked to CPI or market rent reviews often create confusion in IFRS 16 reporting. Some organisations can overstate liabilities by forecasting the maximum possible increases, while others forget to adjust forecasted values after actual changes occur.
How to avoid this:
- Base initial measurements on the rate or index at lease commencement.
- Remeasure leases once rate adjustments take effect.
- Maintain clear records of indexation and calculation methods for auditors.
6. Inadequate Documentation and Record-Keeping
Auditors and regulators expect a clear trail of decisions related to IFRS 16 calculations – equally crucial for finance compliance. But unfortunately, a spreadsheet is not best suited to retaining supporting evidence for key judgments such as discount rates, lease terms, or exemptions applied. This can result in delays or findings during audits.
How to avoid this:
- Maintain comprehensive records for all lease accounting decisions.
- Store supporting evidence in a centralised system for easy retrieval.
- Use automated tools to create an audit trail for every modification and disclosure.
7. Over-Reliance on Spreadsheets
Many teams still rely on spreadsheets to manage lease reporting, which increases the likelihood of human error. Formula issues, outdated versions, and manual updates can lead to inaccurate or inconsistent results, particularly for large operating lease or finance lease portfolios.
How to avoid this:
- Transition from spreadsheets to purpose-built IFRS 16 software.
- Adopt systems like Nomos One that provide controlled calculations and real-time updates.
- Train teams to use the platform effectively for improved data accuracy.
8. Not Identifying All Leases or Embedded Leases
Some leases remain hidden in supplier or service agreements, such as exclusive rights to use specific equipment or office space. Missing these can cause incomplete IFRS 16 reporting and misrepresentation of financial obligations.
How to avoid this:
- Review all contracts that grant access to assets or exclusive rights – not just those labelled as “leases.”
- Work across departments to identify embedded lease arrangements.
- Conduct periodic audits to ensure completeness of the lease portfolio.
9. Failing to Separate Lease and Non-Lease Components
Many leases bundle payments for assets and services together, such as equipment leases that include maintenance or insurance costs. If these non-lease components are not separated correctly, the lessee may overstate the value of the right-of-use asset and lease liability.
How to avoid this:
- Identify all non-lease components within agreements.
- Allocate payments based on the standalone price of each service.
- Document assumptions and justifications for separating different components.
10. Ignoring the Impact on Financial Ratios and Covenants
Bringing leases onto the balance sheet can significantly affect key performance indicators such as debt ratios, EBITDA, and return on assets. Many businesses underestimate these effects and are caught off guard during covenant reviews or when presenting results to stakeholders.
How to avoid this:
- Assess how lease accounting changes impact key ratios and covenants.
- Communicate expected adjustments with financial stakeholders early.
- Regularly update projections to reflect changes in lease data.
Build Stronger Compliance Foundations
Strong IFRS 16 reporting practices require more than just accurate calculations. They depend on systems, processes, and teamwork that promote precision and transparency.
To ensure lasting financial compliance, consider the following steps:
- Centralise all lease data for consistency and accessibility.
- Automate alerts for renewals, reviews, and expiry dates.
- Conduct regular internal reviews to verify compliance with lessee accounting principles.
- Provide ongoing staff training to maintain up-to-date expertise.
- Utilise technology platform like Nomos One to automate lease management, accounting, reporting, and compliance tracking..
IFRS 16 compliance requires more than just accurate calculations. It demands discipline, consistency, and clear communication across departments.
In depth, the most effective organisations establish structured processes supported by technology that promotes accuracy and transparency. A centralised data management and automation system can reduce manual effort by more than half, freeing finance teams to focus on strategy rather than administration.
If you’ve read through these common oversights and found yourself thinking the same, that it’s time to simplify your lease accounting, improve accuracy, and ensure full compliance, then perhaps it’s time to see what an automated solution can do for you.
What Nomos One Can Do
Ease Your Lease Management/Accounting Burden
Nomos One helps finance and property teams manage every aspect of IFRS 16 reporting and lease compliance in one central platform.
More than reading, see it for yourself. Explore how Nomos One can make your lease management smarter, simpler, and more compliant today.
Want to learn more about IFRS 16 lease management/accounting?
Suggested Resources:
- Simplifying Lease Modifications and Lease Terminations with Automation.
- Managing Lease Events for Effective Lease Administration for workflow automation.
- IFRS 16 in Practice: A Worked Example which illustrates rate calculations.
- Understanding the IFRS 16 Impact on Lease Accounting for financial measurement details.
- Key Considerations When Accounting for Leases for guidance on recognition and separation.
- The entire section to Five IFRS 16 Lease Accounting Mistakes as it covers common term-related errors.
- Get Rid of Your IFRS 16 Calculation Spreadsheets.
- IFRS 16 Resources for broader compliance tips on components
