IFRS 16 lease accounting: liabilities, assets and a Swiss example
Under IFRS 16, a lease can create both an asset and a liability in the lessee's accounts, even though the cash rental payments stay the same. Explore the core rules, a worked example and the information to prepare for your reporting.
By Sarah Prieur · Swiss certified accountant
IFRS 16: the essentials
IFRS 16 governs lease accounting in IFRS reporting. For the lessee, it generally requires an asset representing the right to use the leased item and a liability for the lease payments included in the calculation.
- First determine whether the contract meets the definition of a lease.
- Calculate the liability by discounting the relevant payments.
- Exemptions are available for qualifying short-term leases and leases of low-value assets.
- The lessor's accounting model differs from the lessee's.
These rules do not automatically apply to a Swiss business preparing only statutory accounts under the Code of Obligations. Our article on IFRS and IAS explains when international reporting may be needed.
How do you identify a lease?
The contract must convey control over the use of an identified asset for a period in exchange for consideration. Assess both the economic benefits obtained and the right to direct how the asset is used.
A dedicated office or identified machine may meet the criteria. A transport or cloud-hosting service does not automatically constitute a lease: read the customer's and supplier's rights carefully.
A supplier's substantive substitution rights may change the assessment. Labels such as “service”, “subscription” or “leasing” cannot settle the question on their own.
Practical tip: review contracts managed outside the finance department too, including property, logistics, IT equipment and production. Procurement may never have classified an arrangement containing a lease as a rental contract.
Exemptions and components to separate
A lessee may elect an exemption for qualifying short-term leases: the lease term at commencement must be twelve months or less, and the lease must not contain a purchase option. Another exemption covers certain low-value assets, assessed using their value when new.
IFRS 16 does not prescribe a universal Swiss franc threshold for every business. A car or building is not a low-value asset simply because the monthly rental payment is small.
A contract may also include services such as maintenance. Assess whether components should be separated and whether an available practical expedient is appropriate. Keeping a clear breakdown helps with both initial accounting and subsequent amendments.
Payments excluded from the lease liability because of their nature still need accounting treatment and, where relevant, disclosure. Excluding an amount from the liability does not remove its effect on profit or cash flow.
Calculate the lease liability: a three-year example
A business leases an asset for three years and pays CHF 12,000 at the end of each year. The assumed discount rate is 5%. There are no prepayments, incentives, initial direct costs, options or restoration obligations. VAT is excluded.
The initial liability is the present value of the three payments:
CHF 12,000 ÷ 1.05 + CHF 12,000 ÷ 1.05² + CHF 12,000 ÷ 1.05³ ≈ CHF 32,679.
| First year, rounded amounts | Amount |
|---|---|
| Liability at commencement | CHF 32,679 |
| Interest for the year at 5% | CHF 1,634 |
| Payment at year-end | CHF −12,000 |
| Liability after payment | CHF 22,313 |
The 5% rate is an illustrative assumption, not a recommended borrowing rate. IFRS 16 uses the interest rate implicit in the lease when it can be readily determined. Otherwise, establish the lessee's incremental borrowing rate using the relevant characteristics.
Recording the undiscounted total of CHF 36,000 would overstate the initial liability under these assumptions. The interest charge subsequently reflects the passage of time.
Effects on the balance sheet, profit and EBITDA
In the simplified example, the initial right-of-use asset is also CHF 32,679. Straight-line depreciation over three years is approximately CHF 10,893 annually. The first year therefore carries around CHF 12,527 of expense: CHF 10,893 of depreciation and CHF 1,634 of interest.
The year's total expense differs from the CHF 12,000 cash rental payment. It changes as interest is calculated on the outstanding liability. The balance sheet shows both the asset and the remaining obligation.
EBITDA may increase compared with treating rent as an operating expense, depending on how the measure is defined. That increase does not mean the business pays less or generates additional cash.
Financing agreements may define ratios in ways that include or exclude the effects of accounting standard changes. Read the covenants before assuming that recognising an IFRS 16 liability automatically breaches a bank agreement.
The cash flow statement must also use the applicable classifications. Total cash paid continues to reflect actual payments.
Lease terms, indexation and modifications
The lease term does not always end at the first contractual break date. Assess extension and termination options under the standard's criteria, including whether exercise of an extension option, or non-exercise of a termination option, is reasonably certain.
Significant leasehold improvements, relocation constraints and the importance of a site may be relevant. Document the conclusion and keep it consistent with operational decisions.
Index-linked payment changes, certain option reassessments and contract modifications may require remeasurement. The calculation and discount rate to use depend on the event.
Set up a process for notifying finance of new contracts, amendments and terminations. An accurate initial spreadsheet quickly becomes unreliable if nobody updates the underlying information.
What should you prepare for year-end?
A useful lease register records the asset, contract, key dates, payments, indexation, options, separate service components, discount rate and events during the year.
Reconcile registered payments with bank transactions and expenses. Check the closing liability, depreciation of the right-of-use asset and required financial statement disclosures.
The lessee must also monitor indications of impairment affecting the right-of-use asset. A closed site that remains under lease requires an assessment beyond automatically continuing the original schedule.
An IFRS conversion may require reconstructing the lease history. Collecting amendments now preserves evidence for that work. Include the register review in your year-end accounting process.
Frequently asked questions
Does IFRS 16 cover office leases?
Yes, if they meet the definition of a lease and fall within the IFRS reporting scope. Buildings do not qualify for the low-value asset exemption.
Is a lease shorter than one year always exempt?
No. Assess the lease term under IFRS 16, any options and the exemption's conditions. A stated twelve-month term with a relevant extension option may require further analysis. The exemption is an accounting election, not an automatic exclusion.
Is the right-of-use asset always equal to the lease liability?
No. Prepayments, incentives, qualifying initial direct costs and certain restoration obligations can create differences. The amounts match in our example because of its simplified assumptions.
Does IFRS 16 automatically improve profitability?
No. It changes the presentation and timing of certain expenses. An increase in EBITDA does not, by itself, represent an economic improvement.
Does the lessor use the same model as the lessee?
No. Lessors retain a distinction between finance leases and operating leases under the standard's criteria. The calculations in this article concern the lessee.
