IFRS 16 Examples: Real-World Lease Accounting Case Studies
Understanding IFRS 16 lease accounting is much easier when you work through real examples with actual numbers. This comprehensive guide provides detailed case studies showing exactly how to apply IFRS 16 to common lease scenarios, complete with journal entries, calculations, and common mistakes to avoid.
Whether you're an accountant, auditor, or finance professional in Singapore, Malaysia, or any IFRS-adopting jurisdiction, these practical examples will help you master lease accounting for office space, equipment, and fleet vehicles.
Example 1: Office Space Lease (Multinational Company)
Scenario: TechCorp Singapore Pte Ltd
Background: TechCorp Singapore leases a 5,000 sq ft office space in the Central Business District for its regional headquarters.
Lease Details:
- Commencement Date: January 1, 2025
- Lease Term: 60 months (5 years)
- Monthly Rent: $15,000
- Payment Timing: Start of each month (Annuity Due)
- Security Deposit: $45,000 (refundable, recorded separately)
- Initial Direct Costs: $12,000 (broker fees, legal costs)
- Lease Incentive: 2 months rent-free period (Months 1-2)
- Incremental Borrowing Rate: 5.0% per annum
- Extension Option: 3 years (not reasonably certain to exercise)
Step 1: Calculate Initial Lease Liability
Lease Payments to Include:
- Total lease term: 60 months
- Rent-free period: 2 months (no payment required)
- Actual payments: 58 months × $15,000 = $870,000
- Payments start at Month 3 (after rent-free period)
Monthly interest rate = 5.0% / 12 = 0.4167%
For 58 payments of $15,000 starting Month 3 (annuity due):
PV = $15,000 × [(1 - (1.004167)^-58) / 0.004167] × (1.004167)
PV = $15,000 × 52.9876 × 1.004167
PV = $797,896
Discount back 2 months (for rent-free period):
PV at commencement = $797,896 / (1.004167)^2
Initial Lease Liability = $791,269
Step 2: Calculate Initial Right-of-Use Asset
ROU Asset Components:
| Initial Lease Liability | $791,269 |
| Add: Initial Direct Costs | $12,000 |
| Add: Prepaid Rent (none) | $0 |
| Less: Lease Incentive (2 months free) | ($30,000) |
| Initial ROU Asset | $773,269 |
Step 3: Journal Entries
January 1, 2025 (Commencement Date)
Dr. Lease Incentive Receivable $30,000
Cr. Lease Liability $791,269
Cr. Cash (Initial Direct Costs) $12,000
(To recognize ROU asset, lease liability, and initial costs)
January 1, 2025 (Security Deposit - Separate)
Cr. Cash $45,000
(Security deposit is not part of lease liability)
January 31, 2025 (First Month-End - Rent-Free Period)
Cr. Accumulated Depreciation – ROU $12,888
(Depreciation: $773,269 / 60 months = $12,888)
Dr. Interest Expense $3,297
Cr. Lease Liability $3,297
(Interest: $791,269 × 5% / 12 = $3,297)
March 1, 2025 (First Payment After Rent-Free Period)
Cr. Cash $15,000
(Monthly lease payment)
March 31, 2025 (Month-End After First Payment)
Cr. Accumulated Depreciation – ROU $12,888
Dr. Interest Expense $3,289
Cr. Lease Liability $3,289
(Interest on reduced balance: $789,863 × 5% / 12)
Year 1 Summary (2025)
Financial Statement Impact:
Profit & Loss (Year 1):
- Depreciation Expense: $12,888 × 12 = $154,656
- Interest Expense (decreasing monthly): ~$38,500
- Total P&L Impact: $193,156
Balance Sheet (December 31, 2025):
- ROU Asset: $773,269 - $154,656 = $618,613
- Lease Liability (Current): ~$175,000
- Lease Liability (Non-Current): ~$480,000
Cash Flow (Year 1):
- Operating Activities (Interest): $38,500
- Financing Activities (Principal): $141,500
- Total Cash Outflow: $180,000 (12 months × $15,000)
Example 2: Equipment Lease (Manufacturing)
Scenario: ManuFab Malaysia Sdn Bhd
Background: A manufacturing company leases specialized machinery for its production line.
Lease Details:
- Equipment: CNC Machining Center
- Commencement Date: July 1, 2025
- Lease Term: 4 years (48 months)
- Quarterly Payment: RM 25,000
- Payment Timing: End of each quarter (Ordinary Annuity)
- Purchase Option: RM 50,000 at end of Year 4 (reasonably certain to exercise)
- Fair Value of Equipment: RM 450,000
- IBR: 6.0% per annum
- Estimated Useful Life: 10 years
Step 1: Assessment - Is This a Finance Lease?
Analysis:
- Ownership transfer? Yes (purchase option reasonably certain)
- Purchase option: RM 50,000 is significantly below expected fair value
- Lease term: 4 years is 40% of useful life (10 years)
- PV of payments: Will calculate below
Conclusion: This has characteristics of a finance lease under IAS 17 terms, but under IFRS 16, all leases are treated similarly by lessees. The purchase option must be included in lease liability.
Step 2: Calculate Initial Lease Liability
Quarterly interest rate = 6.0% / 4 = 1.5% per quarter
PV of quarterly payments (Ordinary Annuity):
PV = RM 25,000 × [(1 - (1.015)^-16) / 0.015]
PV = RM 25,000 × 14.1313
PV = RM 353,283
PV of purchase option:
PV = RM 50,000 / (1.015)^16
PV = RM 50,000 / 1.2690
PV = RM 39,401
Total Initial Lease Liability = RM 392,684
Verification: PV (RM 392,684) / Fair Value (RM 450,000) = 87.3% - substantially all of the asset's value is captured.
Step 3: Journal Entries
July 1, 2025 (Commencement)
Cr. Lease Liability RM 392,684
(To recognize leased equipment and obligation)
September 30, 2025 (First Payment - End of Q1)
Dr. Lease Liability RM 19,110
Cr. Cash RM 25,000
(Interest: RM 392,684 × 1.5% = RM 5,890; Principal: RM 19,110)
Dr. Depreciation Expense RM 9,817
Cr. Accumulated Depreciation – ROU RM 9,817
(Quarterly depreciation: RM 392,684 / 40 years = RM 9,817)
Note: Depreciated over 10-year useful life as ownership transfers
December 31, 2025 (Second Payment - End of Q2)
Dr. Lease Liability RM 19,396
Cr. Cash RM 25,000
(Interest on new balance: RM 373,574 × 1.5% = RM 5,604)
Dr. Depreciation Expense RM 9,817
Cr. Accumulated Depreciation – ROU RM 9,817
Amortization Schedule (First 4 Quarters)
| Quarter | Opening Balance | Payment | Interest (1.5%) | Principal | Closing Balance |
|---|---|---|---|---|---|
| Q1 (Sep 2025) | RM 392,684 | RM 25,000 | RM 5,890 | RM 19,110 | RM 373,574 |
| Q2 (Dec 2025) | RM 373,574 | RM 25,000 | RM 5,604 | RM 19,396 | RM 354,178 |
| Q3 (Mar 2026) | RM 354,178 | RM 25,000 | RM 5,313 | RM 19,687 | RM 334,491 |
| Q4 (Jun 2026) | RM 334,491 | RM 25,000 | RM 5,017 | RM 19,983 | RM 314,508 |
Notice how interest expense decreases each quarter as the lease liability balance reduces.
Example 3: Fleet Vehicle Accounting (Retailer)
Scenario: RetailCo Fleet Lease
Background: A retail company leases 10 delivery vans for its logistics operations.
Lease Details:
- Number of Vehicles: 10 vans
- Cost per Van: $3,500/month
- Total Monthly Payment: $35,000
- Lease Term: 36 months
- Payment Timing: Start of each month (Annuity Due)
- Mileage Allowance: 15,000 km/year per van
- Excess Mileage Fee: $0.20/km (variable, not included in liability)
- IBR: 4.8% per annum
- Commencement: January 1, 2025
Step 1: Determine Lease Payments
Fixed vs. Variable Payments:
- Fixed: $35,000/month × 36 months = $1,260,000 total
- Variable (Excluded): Excess mileage fees - these are usage-based and not included in initial measurement
Included in Lease Liability: Only the fixed $35,000/month payments
Step 2: Calculate Present Value
Monthly rate = 4.8% / 12 = 0.4%
Number of payments = 36
PV = $35,000 × [(1 - (1.004)^-36) / 0.004] × (1.004)
PV = $35,000 × 33.7056 × 1.004
PV = $35,000 × 33.8405
Initial Lease Liability = $1,184,418
Step 3: Journal Entries
January 1, 2025 (Lease Commencement)
Cr. Lease Liability $1,184,418
(To recognize fleet lease)
January 1, 2025 (First Payment - Made Immediately)
Cr. Cash $35,000
(First payment reduces principal only - no interest yet)
January 31, 2025 (Month-End Accruals)
Cr. Accumulated Depreciation $32,901
(Monthly depreciation: $1,184,418 / 36 = $32,901)
Dr. Interest Expense $4,598
Cr. Lease Liability $4,598
(Interest on reduced balance: $1,149,418 × 0.4% = $4,598)
February 1, 2025 (Second Payment)
Cr. Cash $35,000
December 31, 2025 (If Excess Mileage Incurred)
Cr. Accounts Payable/Cash $12,000
(Variable lease expense - e.g., 60,000 km excess × $0.20)
This is NOT included in lease liability measurement
Year 1 Financial Impact
Profit & Loss (2025):
- Depreciation Expense: $32,901 × 12 = $394,812
- Interest Expense: ~$51,500 (decreasing monthly)
- Variable Lease Expense (if applicable): $12,000
- Total Expense: ~$458,312
Compare to IAS 17 (Operating Lease):
- Old method: Straight-line rent expense = $35,000 × 12 = $420,000
- IFRS 16 Year 1 total: $458,312
- Difference: $38,312 higher expense in Year 1
This front-loading of expense is a key characteristic of IFRS 16. By Year 3, total expense will be lower than straight-line.
Common Mistakes and How to Avoid Them
Mistake 1: Including Variable Payments in Initial Measurement
Wrong: Including estimated excess mileage fees or performance-based rent in lease liability.
Correct: Only include variable payments that depend on an index or rate (e.g., CPI-linked rent). Usage-based or performance-based fees are excluded and expensed as incurred.
Example: In the fleet lease above, excess mileage at $0.20/km is NOT included. Only if the lease said "rent increases annually by CPI" would that be included.
Mistake 2: Forgetting to Discount Payments
Wrong: Recording lease liability as total undiscounted payments ($35,000 × 36 = $1,260,000).
Correct: Always discount using IBR or implicit rate. The liability is present value: $1,184,418 in the fleet example.
Why it matters: Overstating liability by ~$75,000 would misrepresent debt ratios and financial position.
Mistake 3: Wrong Payment Timing (Annuity Due vs. Ordinary)
Issue: Using ordinary annuity formula when payments are in advance (or vice versa).
Impact: Can cause 1-2% error in PV calculation.
How to check: Look for "payable in advance" (Annuity Due) or "payable in arrears" (Ordinary Annuity) in the lease contract.
Calculator tip: Our IFRS 16 Calculator has a dropdown for this - always double-check your selection.
Mistake 4: Incorrect Handling of Rent-Free Periods
Wrong: Excluding rent-free periods from the lease term or failing to account for them in PV calculation.
Correct: Rent-free periods are part of the lease term. In the office example, we had 58 payments over 60 months. The PV must account for the timing delay.
Impact: Can understate lease liability by 3-5% if done incorrectly.
Mistake 5: Security Deposits in Lease Liability
Wrong: Including refundable security deposits in lease liability.
Correct: Security deposits are recorded separately as an asset (Deposits Receivable) because they'll be returned at lease end.
Journal Entry: Dr. Security Deposit $45,000 / Cr. Cash $45,000
Mistake 6: Depreciating Over Wrong Period
Wrong: Always depreciating over lease term.
Correct: Depreciate over the shorter of:
- Lease term (most common), OR
- Useful life of asset (if ownership transfers or purchase option reasonably certain)
Example: Equipment lease with purchase option was depreciated over 10-year useful life, not 4-year lease term.
Mistake 7: Forgetting Extension Options
Issue: Not including extension periods when they're reasonably certain to be exercised.
Assessment factors:
- Economic incentive to extend
- Significant leasehold improvements
- Costs to relocate
- Importance of location
Note: This requires significant judgment. Document your assessment for auditors.
Mistake 8: Using Wrong Interest Rate
Wrong: Using a fixed rate like 5% for all leases without analysis.
Correct: IBR should reflect:
- Company's credit rating
- Lease term length
- Economic environment
- Currency of payments
Singapore/Malaysia reference: Check the IBR Reference Rates section for current bank lending rates.
Using a Calculator for Complex Leases
Manual calculation of lease liabilities can be time-consuming and error-prone, especially for:
- Leases with rent-free periods
- Mid-term modifications or rent increases
- Multiple lease components
- Leases with purchase options
- Large portfolios of leases
Benefits of Using Our IFRS 16 Calculator
- Instant PV calculation: No need to manually calculate present value formulas
- Complete amortization schedule: Period-by-period breakdown of interest and principal
- Handles modifications: Built-in support for lease changes and remeasurements
- Annuity Due & Ordinary Annuity: Automatic adjustment for payment timing
- Excel export: Download audit-ready schedules for workpapers
- Error-free: Eliminates manual calculation mistakes
Ready to Calculate Your Lease Liability?
Try our free IFRS 16 calculator with any of the examples above. Input your lease details and get a complete amortization schedule in seconds.
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