What is IFRS 16 and how will it impact organizations in 2025?
IFRS 16 is arguably the most significant change to lease accounting reporting in over 30 years, and organizations need to have a strategy to meet this accounting standard to ensure their organization is not disrupted by failure to comply.
Those still using legacy systems will struggle with IFRS 16 management, creating yet more manual work for internal finance teams. If your reporting is not yet compliant with IFRS 16 lease accounting standards, it’s wise to prepare now.
Public Sector leaders must work together to manage financial teams for compliance with digital tools that ensure accuracy and efficiency in this process, to adhere with IFRS 16 and FRS 102 – a financial reporting standard for the UK.
Keep reading to learn about IFRS 16, the challenges organizations will face in compliance, and how Unit4 can provide a Cloud-based FP&A solution.
What is IFRS 16?
IFRS 16 is an international accounting standard that regulates how organizations report their lease contracts.
The main objective of IFRS 16 is to increase the transparency and comparability of financial information by requiring certain organizations to recognize all leases on their balance sheets.
IFRS 16 takes a new approach to lease accounting with what they call a ‘right-of-use’ model. This means if an organization has a right to use, or control, an asset, it must be classed as a lease and thus recognized on a balance sheet.
Previously, significant financial leases could be held off balance sheets under previous rules; IFRS 16 ensures that all leased assets are reported in a standardized way to bring transparency.
Like other accounting standard changes, an organization will need to prepare a set of comparative accounts for the prior year as well, highlighting the need for action within the office of the CFO to prepare succinctly for this accounting standard.
What is FRS 102?
FRS 102 is an amendment to financial reporting standards that is in alignment with IFRS 16 for the UK. FRS 102 amendment aims to align revenue and lease accounting with current IFRS standards to minimize the impact on financial reporting.
The effective date for most amendments is periods beginning on or after 1 January 2026, with early adoption permitted. While this seems far away, UK organizations will need to collect data, make accounting amendments and implement tools ahead of this date.
The changes to UK GAAP will mirror the IFRS 16 leases approach. Existing operating leases under FRS 102 will be brought on-balance sheet. Some elements that will be affected:
- Liability - A lease liability will be recorded, representing the obligation to make lease payments throughout the lease term. This liability is measured as the present value of future lease payments and will decrease over time as interest expense is recognized. Lease payments will directly reduce the liability.
- Asset - A corresponding right-of-use asset will be recognized and depreciated over the lease term. The initial measurement of this asset will generally align with the value of the lease liability, with potential adjustments applied.
- Profit and Loss (P&L) Statements - Depreciation of the right-of-use asset will be recorded as an expense, and the lease liability will unwind progressively, with interest expense recognized over the lease term.
These balances require regular reassessment for factors like indexation, rent reviews, or changes in the lease term. Adjustments outside the existing lease terms, such as changes in lease scope, may require accounting for lease modifications, which can be complex.
The challenges organizations will face in complying with IFRS 16 and FRS 102
Not all countries are as ready for IFRS 16 as others. In the UK, local government readiness to adopt new accounting standards has been slow due to limited resource constraints – including global talent shortages within accounting, and spending cuts.
The impact of IFRS 16 on an organization’s financial statements will be significant - organizations that have a lot of operating leases will see an increase in their assets and liabilities, which may affect their leverage ratios, debt covenants, and credit ratings.
Income statements will be subsequently affected, as the lease expense will be replaced by depreciation and interest expenses, which may affect profitability ratios or even the ability to deliver services that rely on leased assets.
Additionally, organizations will have to disclose more information about their lease contracts, such as maturity analysis, discount rates, and lease payments.
IFRS 16 only applies to those that prepare their financial statements under the International Financial Reporting Standards (IFRS), which are mainly large multinational groups or listed companies belonging to consolidated groups.
However, even if an organization does not use IFRS, it may still be affected by IFRS 16 indirectly, as it may have to deal with customers, suppliers, or investors that do use IFRS and have to comply with the new standard.
How will legacy systems cope with these changes to lease accounting?
Many organizations use spreadsheets like Excel to manage their data and reporting requirements. However, they quickly encounter the limitations and inefficiencies of these legacy tools, particularly when handling complex and high-volume financial data.
Reliance on Excel is often characterized by manual reconciliation of figures, data entry errors, and overworked teams. These challenges are compounded by the reality that detailed financial analysis, such as lease accounting, is only addressed at the year-end, rather than being part of routine monthly processes.
Feedback from organizations suggests a common pain point: even with as few as 10–20 property leases, the associated annual costs can run into the millions. This leads to substantial adjustments at year-end, which can significantly affect key metrics such as operating profit and EBITDA.
These adjustments can add tens of millions to the balance sheet, raising concerns among trustees and senior stakeholders and prompting demands for further details, straining resources.
With functionality to manage these adjustments monthly instead of deferring them to year-end, organizations can allow the restated balance sheet to integrate smoothly into routine financial processes.
The obstacle preventing this monthly agility and flexible workflow is the lack of functionality within legacy applications like Excel, which cannot cope with the changes being implemented. This requires the office of the CFO to invest in digital Cloud-based FP&A solutions that make lease accounting and compliance simple.
How Unit4 FP&A can help with IRFS 16 compliance
The best way to ensure all your leases comply with the new standards is by investing in a digital solution that quickly migrates you to IFRS 16 in as few steps as possible.
Our IFRS 16 app helps you identify the effects of each leasing contract with intuitive point-and-click simulation and analysis options (including visualizations) so you can see the full picture, enabling an easy introduction to IFRS 16.
This digital solution will help you easily and efficiently manage large volumes of complex leasing data, enabling you to quickly identify the effects of each leasing contract on a balance sheet, income statement, and KPIs.
Unit4 FP&A lease accounting software for IFRS 16 can make compliance with these new rules timely, effective, and succinct - designed to improve reporting accuracy and transparency.
This helps organizations by:
- Automating the importing of leasing contracts
- Providing multi-user access to manage lease reporting in a secure and scalable platform
- Identifying the effects of each leasing contract on the balance sheet and providing transparent calculations with the ability to annotate each line item
- Offering an ERP connectivity or CSV-compatible solution to easily link and utilize your existing data
- Intuitive simulation and analysis to understand the full picture, model changes, and report effectively from a common data model.
Implementing IFRS 16 with Unit4 can be done in three simple steps.
- First, import or use a database recording of your organization’s leasing contracts.
- Next, identify the effects of accounting for each contract, and then aggregate the effects for each selected dimension.
- Finally, create a posting template to transfer data to the ERP or consolidation system to adjust the consolidated financial statements according to IFRS 16 standards.
Robert Abery, Management Accountant of East England Ambulance Service NHS Trust, a Unit4 customer, testifies to the efficiency of Unit4 FP&A in managing IFRS 16 accounting:
“Using the Unit4 IFRS 16 software solution, we can import all the lease contracts quickly and easily. We can then identify the effects of accounting for each contract, and aggregate those to different cost centers.”
Unit4 FP&A is supported by our people-centric Unit4 ERP. Visit our website to learn more about our IFRS 16 software solution or talk to sales today.
