IFRS 16 changed how leases are accounted for, bringing most of them onto the balance sheet. This guide explains right-of-use assets, lease liabilities and the exemptions.
Published July 2026 · Updated July 2026
IFRS 16, Leases, sets out how companies account for leases. Its big change, effective from 2019, was to bring most leases onto the balance sheet for the business using the asset (the lessee).
Instead of treating rent as a simple expense, the lessee records a 'right-of-use' asset (the right to use the item) and a lease liability (the obligation to pay). Over the lease, the asset is depreciated and the liability unwinds with interest.
There are practical carve-outs. Short-term leases (12 months or less) and leases of low-value items can be kept off balance sheet and expensed as before, which helps smaller arrangements.
You lease equipment for £10,000 a year over 3 years:
Companies under FRS 102 (UK GAAP) still use the older operating/finance lease split, though FRS 102 is being updated to move closer to IFRS 16. Full IFRS reporters apply IFRS 16 now.
To make balance sheets more honest. Previously many big lease commitments were off balance sheet, hiding real obligations from investors.
IFRS 16 mainly changed lessee accounting. Lessor accounting stayed largely similar, still splitting leases into types.
Source: IFRS Foundation ↗. This glossary is written for small business owners, so definitions are simplified. Tax rates and thresholds reflect 2026/27 UK rules and change over time. Berified does not provide accounting, tax or legal advice; always check the source or a qualified adviser.