ACCA Strategic Professional · Strategic Business Reporting (International)

IFRS 16 Leases for ACCA SBR: Chapter Guide

Leases in SBR means applying IFRS 16. A contract is a lease if it gives you the right to control an identified asset for a period in exchange for payment. Lessees recognise a right-of-use asset and a lease liability. Lessors classify leases as finance or operating. You must calculate, explain and advise.

What this chapter covers

This chapter covers IFRS 16 Leases. You start by deciding whether a contract contains a lease at all. Then you account for it as a lessee, deal with changes to the lease, look at the lessor's side, handle sale and leaseback deals, and finish with presentation, disclosure and ethical issues.

In SBR, leases are rarely tested as a pure calculation. A scenario usually gives you a messy contract, such as a property with a substitution right, a rent review, or a lease extension. You must decide the treatment, compute the numbers, and explain your reasoning to a reader such as a finance director or an audit committee.

The chapter links to other parts of the paper. Lease liabilities use discounting, so it connects to financial instruments and fair value. Right-of-use assets connect to impairment and depreciation. Sale and leaseback connects to revenue recognition under IFRS 15. Lease classification and lease-related ratios affect gearing and earnings, which links to performance reporting and to ethics questions about manipulating results. Leases can also sit inside a group accounting question.

Leases affect almost every real company's statement of financial position, so examiners return to them often, either as a full question or as one part of a longer one. The topic suits the written, scenario-based format because it needs judgement as well as arithmetic. Marks go to correct figures, but also to applying the definition to the facts and explaining the effect on the financial statements. It also earns professional skills marks, because you can show analysis and commercial awareness by explaining what the change means for gearing, profit and covenants. Candidates who know the rules cold can pick up marks quickly and save time for harder questions.

Leases: topics in the order to study them

1IFRS 16 Scope, Definition and Identifying a LeaseEvery other topic depends on deciding first whether a contract is a lease, so learn the identified asset and control tests here.
2Lessee Accounting: Right-of-Use Asset and Lease LiabilityThis is the core calculation area and the most likely to be tested, so master initial measurement and subsequent measurement before anything else.
3Lease Modifications and RemeasurementIt builds directly on the lessee model, because you need the original liability and asset figures to adjust them.
4Lessor Accounting: Finance and Operating LeasesOnce you know the lessee side, the lessor's classification test and treatment are easier to learn as a contrast.
5Sale and Leaseback TransactionsIt combines lessee accounting with the rules on transfer of an asset, so it comes after you are comfortable with both.
6Lease Presentation, Disclosure and Ethical/Reporting IssuesFinish with presentation, disclosure and ethics, which you apply to everything above in written answers.

How to prepare Leases

Leases reward a method you can repeat under time pressure. Practise the steps in the same order each time so you do not miss marks in the scenario.

Learn the definition of a lease and write out the tests for an identified asset, right to obtain substantially all economic benefits, and right to direct use. Apply them to short fact patterns.
Build the lessee model on one simple example: discount the payments, add initial costs and prepayments, then set up the liability schedule and depreciation. Redo it until you can do it without notes.
Practise variations: payments in advance or arrears, residual value guarantees, variable payments linked to an index, and short-term or low-value exemptions.
Work through modifications and remeasurements. For each case, decide whether it is a separate lease or a change to the existing one, then adjust the liability and asset.
Learn the lessor classification test and the sale and leaseback steps, then do exam-style questions where you must decide treatment from a scenario.
Write full answers to past-style scenarios. Give the rule, apply it to the facts, show the numbers and state the effect on the financial statements and key ratios.
Finish by drafting short explanations on disclosure and ethical concerns, such as pressure to structure contracts to keep liabilities off the statement of financial position.

Common mistakes in Leases

Treating every contract with a payment for an asset as a lease without testing for an identified asset and control.
Fix: Always start by stating the tests and applying each one to the facts, including any substitution rights, before you calculate.
Discounting payments incorrectly, for example mixing up payments in advance and in arrears or using the wrong number of periods.
Fix: Sketch a short timeline first, mark each payment date, and then discount. Check that the closing liability moves as expected.
Leaving out initial direct costs, prepayments, incentives or restoration costs when measuring the right-of-use asset.
Fix: Use a standard layout: initial liability, add payments before commencement and costs, deduct incentives. Scan the scenario for each item.
Getting modifications wrong by always adjusting the existing lease or always treating the change as a new lease.
Fix: Ask whether the scope increases and whether the price rises by a stand-alone amount. Only then pick the treatment.
Recognising the full gain in a sale and leaseback.
Fix: Check whether it is a sale, then compute the gain only on the rights transferred and show the working clearly.
Writing numbers without explanation, so the answer earns few discussion or professional skills marks.
Fix: Add short comments on why the treatment applies, how it changes the financial statements and ratios, and any ethical concern about presentation.

Last-day revision: Leases

A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
A supplier's substantive right to substitute the asset means there is no identified asset.
Lessees recognise a right-of-use asset and a lease liability at the commencement date.
Lease liability is the present value of unpaid lease payments, discounted at the rate implicit in the lease, or the lessee's incremental borrowing rate if that cannot be readily determined.
Right-of-use asset is the initial liability plus payments made at or before commencement, initial direct costs and restoration costs, less incentives received.
Interest accrues on the liability using the discount rate, and payments reduce it; the asset is depreciated, normally over the shorter of lease term and useful life unless ownership transfers.
Short-term leases and low-value asset leases can be expensed on a straight-line basis as an optional exemption.
A modification that adds a right of use at a stand-alone price is a separate lease; otherwise remeasure the liability.
Lessors classify a lease as finance if it transfers substantially all the risks and rewards of ownership; otherwise it is operating.
In a sale and leaseback, first test whether the transfer is a sale under IFRS 15; if not, the seller-lessee keeps the asset and recognises a financial liability.
If it is a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right retained, and recognises only the gain relating to rights transferred.
Disclosures help users understand the amount, timing and uncertainty of lease cash flows.

Leases practice questions

Leases in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Leases: frequently asked questions

Is the Leases chapter important for SBR?

Yes. IFRS 16 affects most entities and suits the scenario-based style of SBR. It can appear as a full question or as part of a larger one, including group accounting.

Do I need to calculate the lease liability by hand in the exam?

You should be able to. Know how to discount payments and build a simple liability schedule with interest and payments. The scenario will normally supply the discount rate and payment pattern.

What is the best order to study IFRS 16?

Start with identifying a lease, then lessee accounting, then modifications, lessor accounting, sale and leaseback, and finally presentation, disclosure and ethics. Each topic builds on the one before it.

How do leases link to ethics questions?

Management may structure or word contracts to keep liabilities or gearing down, or to improve reported profit. You should explain the reporting issue and the professional accountant's responsibilities, such as integrity and objectivity.