This Standard requires lessees to recognise most leases on the balance sheet by recording a right-of-use asset and a corresponding lease liability, and it sets measurement, presentation and disclosure rules for both lessees and lessors. It applies broadly to lease contracts but excludes specified sectors and asset types.
It also adds Australian-specific options and temporary practical expedients (not‑for‑profit measurement choices, public‑sector clarifications, COVID-related rent relief, and interest‑rate benchmark relief). Affected parties must change accounting, increase disclosures and apply significant judgement on lease term, payments and discount rates.
AASB 16 replaces AASB 117 and sets out the Australian requirements for recognition, measurement, presentation and disclosure of leases. It requires lessees to recognise, at lease commencement, a right-of-use asset and a lease liability for nearly all leases (see s22-26), subject to limited lessee exemptions for short-term leases and leases of low-value assets (s5-8 and B3-B8). The Standard preserves a two-track accounting model for lessors, who continue to classify leases as finance or operating leases and account for those accordingly (s61-66; s67-97).
Mechanically, the Standard:
Defines a lease as a contract conveying the right to control the use of an identified asset for a period of time in exchange for consideration (s9; Appendix A).
Requires lessees to measure the right-of-use asset at cost at commencement (s23-25) and the lease liability at the present value of unpaid lease payments (s26-28), discounting using the rate implicit in the lease where that rate is readily determinable, otherwise the lessee’s incremental borrowing rate (s26).
Sets out subsequent measurement: cost model or, where applicable, fair value/revaluation treatments (s29-36, s34-35; Aus35.1 for certain not-for-profit public sector elections).
Prescribes how to separate lease and non-lease components and how to allocate consideration (s12-16; B32-B33).
Governs lease modifications, remeasurements and practical expedients (s44-46A; s46B; B42).
Requires detailed disclosures so users can assess leases’ effects on financial position, performance and cash flows (objective at s1; disclosure requirements s51-60A).
The Standard is framed to be read together with other Australian Accounting Standards; it expressly directs users to consider AASB 1048, AASB 1057 and other Standards such as AASB 13, AASB 15, AASB 116, AASB 136, AASB 140 and AASB 9 where cross-references are made throughout the text (front matter; numerous paragraphs).
Current sections
Direct links to the current provisions in AASB 16 - Leases - February 2016.
20
3
An entity shall apply this Standard to all leases, including leases of right-of-use assets in a sublease, except for:
3 An entity shall apply this Standard to all leases, including leases of right-of-use assets in a sublease, except for:
(a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
(b) leases of biological assets within the scope of AASB 141 Agriculture held by a lessee;
(c) service concession arrangements within the scope of Interpretation 12 Service Concession Arrangements as identified in AASB 1048 Interpretation of Standards;
(d) licences of intellectual property granted by a lessor within the scope of AASB 15 Revenue from Contracts with Customers; and
(e) rights held by a lessee under licensing agreements within the scope of AASB 138 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
Aus3.1 This Standard does not apply to service concession assets recognised in accordance with AASB 1059 Service Concession Arrangements: Grantors.
Aus3.2 Notwithstanding paragraph 3, in respect of not-for-profit public sector licensors, this Standard also applies to licences that are in substance leases or contain leases, excluding licences of intellectual property. AASB 15 applies to licences of intellectual property. AASB 15 also applies to licences of non-intellectual property that, in substance, are not leases or do not contain leases.
4 A lessee may, but is not required to, apply this Standard to leases of intangible assets other than those described in paragraph 3(e).
Recognition exemptions (paragraphs B3–B8)
5
A lessee may elect not to apply the requirements in paragraphs 22–49 to:
5 A lessee may elect not to apply the requirements in paragraphs 22–49 to:
(a) short-term leases; and
(b) leases for which the underlying asset is of low value (as described in paragraphs B3–B8).
6 If a lessee elects not to apply the requirements in paragraphs 22–49 to either short-term leases or leases for which the underlying asset is of low value, the lessee shall recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis. The lessee shall apply another systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
7 If a lessee accounts for short-term leases applying paragraph 6, the lessee shall consider the lease to be a new lease for the purposes of this Standard if:
(a) there is a lease modification; or
(b) there is any change in the lease term (for example, the lessee exercises an option not previously included in its determination of the lease term).
8 The election for short-term leases shall be made by class of underlying asset to which the right of use relates. A class of underlying asset is a grouping of underlying assets of a similar nature and use in an entity’s operations. The election for leases for which the underlying asset is of low value can be made on a lease-by-lease basis.
Identifying a lease (paragraphs B9–B33)
9 At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Paragraphs B9–B31 set out guidance on the assessment of whether a contract is, or contains, a lease.
10 A period of time may be described in terms of the amount of use of an identified asset (for example, the number of production units that an item of equipment will be used to produce).
11 An entity shall reassess whether a contract is, or contains, a lease only if the terms and conditions of the contract are changed.
Separating components of a contract
12 For a contract that is, or contains, a lease, an entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract, unless the entity applies the practical expedient in paragraph 15. Paragraphs B32–B33 set out guidance on separating components of a contract.
13 For a contract that contains a lease component and one or more additional lease or non-lease components, a lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.
14 The relative stand-alone price of lease and non-lease components shall be determined on the basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately. If an observable stand-alone price is not readily available, the lessee shall estimate the stand-alone price, maximising the use of observable information.
15 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. A lessee shall not apply this practical expedient to embedded derivatives that meet the criteria in paragraph 4.3.3 of AASB 9 Financial Instruments.
16 Unless the practical expedient in paragraph 15 is applied, a lessee shall account for non-lease components applying other applicable Standards.
17 For a contract that contains a lease component and one or more additional lease or non-lease components, a lessor shall allocate the consideration in the contract applying paragraphs 73–90 of AASB 15.
Lease term (paragraphs B34–B41)
18
An entity shall determine the lease term as the non-cancellable period of a lease, together with both:
18 An entity shall determine the lease term as the non-cancellable period of a lease, together with both:
(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and
(b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
19 In assessing whether a lessee is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, an entity shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to terminate the lease, as described in paragraphs B37–B40.
20 A lessee shall reassess whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that:
(a) is within the control of the lessee; and
(b) affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term (as described in paragraph B41).
21 An entity shall revise the lease term if there is a change in the non-cancellable period of a lease. For example, the non-cancellable period of a lease will change if:
(a) the lessee exercises an option not previously included in the entity’s determination of the lease term;
(b) the lessee does not exercise an option previously included in the entity’s determination of the lease term;
(c) an event occurs that contractually obliges the lessee to exercise an option not previously included in the entity’s determination of the lease term; or
(d) an event occurs that contractually prohibits the lessee from exercising an option previously included in the entity’s determination of the lease term.
Recognition
22
At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.
22 At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.
Measurement
Initial measurement of the right-of-use asset
23
At the commencement date, a lessee shall measure the right-of-use asset at cost.
23 At the commencement date, a lessee shall measure the right-of-use asset at cost.
24
The cost of the right-of-use asset shall comprise:
24 The cost of the right-of-use asset shall comprise:
(a) the amount of the initial measurement of the lease liability, as described in paragraph 26;
(b) any lease payments made at or before the commencement date, less any lease incentives received;
(c) any initial direct costs incurred by the lessee; and
(d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period.
25 A lessee shall recognise the costs described in paragraph 24(d) as part of the cost of the right-of-use asset when it incurs an obligation for those costs. A lessee applies AASB 102 Inventories to costs that are incurred during a particular period as a consequence of having used the right-of-use asset to produce inventories during that period. The obligations for such costs accounted for applying this Standard or AASB 102 are recognised and measured applying AASB 137 Provisions, Contingent Liabilities and Contingent Assets.
Aus25.1 Notwithstanding paragraphs 23–25, where the lessee is a not-for-profit entity, the lessee may elect to measure right-of-use assets on a class‑by‑class basis at initial recognition at fair value in accordance with AASB 13 Fair Value Measurement for leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives. AASB 1058 Income of Not-for-Profit Entities addresses the recognition of related amounts.
Aus25.2 Right-of-use assets arising under leases that have significantly below-market terms and conditions principally to enable a not-for-profit entity to further its objectives may be treated as a separate class of right-of-use assets to right-of-use assets arising under other leases, despite their similar nature and use in the entity’s operations. Identifying separate classes of right-of-use assets despite their similar nature and use in the entity’s operations applies for the purposes of this Standard and other Standards that refer to classes of assets. However, this approach shall not be applied by analogy to distinguish sub-classes of other assets as separate classes of assets.
Initial measurement of the lease liability
26 At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.
27 At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:
(a) fixed payments (including in-substance fixed payments as described in paragraph B42), less any lease incentives receivable;
(b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date (as described in paragraph 28);
(c) amounts expected to be payable by the lessee under residual value guarantees;
(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option (assessed considering the factors described in paragraphs B37–B40); and
(e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
28 Variable lease payments that depend on an index or a rate described in paragraph 27(b) include, for example, payments linked to a consumer price index, payments linked to a benchmark interest rate (such as LIBOR) or payments that vary to reflect changes in market rental rates.
Subsequent measurement of the right-of-use asset
29 After the commencement date, a lessee shall measure the right-of-use asset applying a cost model, unless it applies either of the measurement models described in paragraphs 34 and 35.
Cost model
30
To apply a cost model, a lessee shall measure the right-of-use asset at cost:
30 To apply a cost model, a lessee shall measure the right-of-use asset at cost:
(a) less any accumulated depreciation and any accumulated impairment losses; and
(b) adjusted for any remeasurement of the lease liability specified in paragraph 36(c).
31 A lessee shall apply the depreciation requirements in AASB 116 Property, Plant and Equipment in depreciating the right-of-use asset, subject to the requirements in paragraph 32.
32 If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a purchase option, the lessee shall depreciate the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise, the lessee shall depreciate the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.
33 A lessee shall apply AASB 136 Impairment of Assets to determine whether the right-of-use asset is impaired and to account for any impairment loss identified.
Other measurement models
34 If a lessee applies the fair value model in AASB 140 Investment Property to its investment property, the lessee shall also apply that fair value model to right-of-use assets that meet the definition of investment property in AASB 140.
35 If right-of-use assets relate to a class of property, plant and equipment to which the lessee applies the revaluation model in AASB 116, a lessee may elect to apply that revaluation model to all of the right-of-use assets that relate to that class of property, plant and equipment.
Aus35.1 Notwithstanding paragraph 35, a not-for-profit public sector entity may elect to measure a class of right-of-use assets at cost or at fair value if the entity applies the revaluation model in AASB 116 to the related class of property, plant and equipment.
Subsequent measurement of the lease liability
36
After the commencement date, a lessee shall measure the lease liability by:
36 After the commencement date, a lessee shall measure the lease liability by:
(a) increasing the carrying amount to reflect interest on the lease liability;
(b) reducing the carrying amount to reflect the lease payments made; and
(c) remeasuring the carrying amount to reflect any reassessment or lease modifications specified in paragraphs 39–46, or to reflect revised in-substance fixed lease payments (see paragraph B42).
37 Interest on the lease liability in each period during the lease term shall be the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability. The periodic rate of interest is the discount rate described in paragraph 26, or if applicable the revised discount rate described in paragraph 41, paragraph 43 or paragraph 45(c).
38 After the commencement date, a lessee shall recognise in profit or loss, unless the costs are included in the carrying amount of another asset applying other applicable Standards, both:
(a) interest on the lease liability; and
(b) variable lease payments not included in the measurement of the lease liability in the period in which the event or condition that triggers those payments occurs.
Reassessment of the lease liability
39 After the commencement date, a lessee shall apply paragraphs 40–43 to remeasure the lease liability to reflect changes to the lease payments. A lessee shall recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. However, if the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, a lessee shall recognise any remaining amount of the remeasurement in profit or loss.
40 A lessee shall remeasure the lease liability by discounting the revised lease payments using a revised discount rate, if either:
(a) there is a change in the lease term, as described in paragraphs 20–21. A lessee shall determine the revised lease payments on the basis of the revised lease term; or
(b) there is a change in the assessment of an option to purchase the underlying asset, assessed considering the events and circumstances described in paragraphs 20–21 in the context of a purchase option. A lessee shall determine the revised lease payments to reflect the change in amounts payable under the purchase option.
41 In applying paragraph 40, a lessee shall determine the revised discount rate as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the date of reassessment, if the interest rate implicit in the lease cannot be readily determined.
42
A lessee shall remeasure the lease liability by discounting the revised lease payments, if either:
42 A lessee shall remeasure the lease liability by discounting the revised lease payments, if either:
(a) there is a change in the amounts expected to be payable under a residual value guarantee. A lessee shall determine the revised lease payments to reflect the change in amounts expected to be payable under the residual value guarantee.
(b) there is a change in future lease payments resulting from a change in an index or a rate used to determine those payments, including for example a change to reflect changes in market rental rates following a market rent review. The lessee shall remeasure the lease liability to reflect those revised lease payments only when there is a change in the cash flows (ie when the adjustment to the lease payments takes effect). A lessee shall determine the revised lease payments for the remainder of the lease term based on the revised contractual payments.
43 In applying paragraph 42, a lessee shall use an unchanged discount rate, unless the change in lease payments results from a change in floating interest rates. In that case, the lessee shall use a revised discount rate that reflects changes in the interest rate.
44
A lessee shall account for a lease modification as a separate lease if both:
44 A lessee shall account for a lease modification as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.
45 For a lease modification that is not accounted for as a separate lease, at the effective date of the lease modification a lessee shall:
(a) allocate the consideration in the modified contract applying paragraphs 13–16;
(b) determine the lease term of the modified lease applying paragraphs 18–19; and
(c) remeasure the lease liability by discounting the revised lease payments using a revised discount rate. The revised discount rate is determined as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the effective date of the modification, if the interest rate implicit in the lease cannot be readily determined.
46 For a lease modification that is not accounted for as a separate lease, the lessee shall account for the remeasurement of the lease liability by:
(a) decreasing the carrying amount of the right-of-use asset to reflect the partial or full termination of the lease for lease modifications that decrease the scope of the lease. The lessee shall recognise in profit or loss any gain or loss relating to the partial or full termination of the lease.
(b) making a corresponding adjustment to the right-of-use asset for all other lease modifications.
46A As a practical expedient, a lessee may elect not to assess whether a rent concession that meets the conditions in paragraph 46B is a lease modification. A lessee that makes this election shall account for any change in lease payments resulting from the rent concession the same way it would account for the change applying this Standard if the change were not a lease modification.
46B The practical expedient in paragraph 46A applies only to rent concessions occurring as a direct consequence of the covid-19 pandemic and only if all of the following conditions are met:
(a) the change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change;
(b) any reduction in lease payments affects only payments originally due on or before 30 June 2022 (for example, a rent concession would meet this condition if it results in reduced lease payments on or before 30 June 2022 and increased lease payments that extend beyond 30 June 2022); and
(c) there is no substantive change to other terms and conditions of the lease.
Presentation
47
A lessee shall either present in the statement of financial position, or disclose in the notes:
47 A lessee shall either present in the statement of financial position, or disclose in the notes:
(a) right-of-use assets separately from other assets. If a lessee does not present right-of-use assets separately in the statement of financial position, the lessee shall:
(i) include right-of-use assets within the same line item as that within which the corresponding underlying assets would be presented if they were owned; and
(ii) disclose which line items in the statement of financial position include those right-of-use assets.
(b) lease liabilities separately from other liabilities. If the lessee does not present lease liabilities separately in the statement of financial position, the lessee shall disclose which line items in the statement of financial position include those liabilities.
48 The requirement in paragraph 47(a) does not apply to right-of-use assets that meet the definition of investment property, which shall be presented in the statement of financial position as investment property.
49 In the statement of profit or loss and other comprehensive income, a lessee shall present interest expense on the lease liability separately from the depreciation charge for the right-of-use asset. Interest expense on the lease liability is a component of finance costs, which paragraph 82(b) of AASB 101 Presentation of Financial Statements requires to be presented separately in the statement of profit or loss and other comprehensive income.
50
In the statement of cash flows, a lessee shall classify:
50 In the statement of cash flows, a lessee shall classify:
(a) cash payments for the principal portion of the lease liability within financing activities;
(b) cash payments for the interest portion of the lease liability applying the requirements in AASB 107 Statement of Cash Flows for interest paid; and
(c) short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability within operating activities.
51 The objective of the disclosures is for lessees to disclose information in the notes that, together with the information provided in the statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessee. Paragraphs 52–60 specify requirements on how to meet this objective.
52 A lessee shall disclose information about its leases for which it is a lessee in a single note or separate section in its financial statements. However, a lessee need not duplicate information that is already presented elsewhere in the financial statements, provided that the information is incorporated by cross-reference in the single note or separate section about leases.
53
A lessee shall disclose the following amounts for the reporting period:
53 A lessee shall disclose the following amounts for the reporting period:
(a) depreciation charge for right-of-use assets by class of underlying asset;
(b) interest expense on lease liabilities;
(c) the expense relating to short-term leases accounted for applying paragraph 6. This expense need not include the expense relating to leases with a lease term of one month or less;
(d) the expense relating to leases of low-value assets accounted for applying paragraph 6. This expense shall not include the expense relating to short-term leases of low-value assets included in paragraph 53(c);
(e) the expense relating to variable lease payments not included in the measurement of lease liabilities;
(f) income from subleasing right-of-use assets;
(g) total cash outflow for leases;
(h) additions to right-of-use assets;
(i) gains or losses arising from sale and leaseback transactions; and
(j) the carrying amount of right-of-use assets at the end of the reporting period by class of underlying asset.
54 A lessee shall provide the disclosures specified in paragraph 53 in a tabular format, unless another format is more appropriate. The amounts disclosed shall include costs that a lessee has included in the carrying amount of another asset during the reporting period.
55 A lessee shall disclose the amount of its lease commitments for short-term leases accounted for applying paragraph 6 if the portfolio of short-term leases to which it is committed at the end of the reporting period is dissimilar to the portfolio of short-term leases to which the short-term lease expense disclosed applying paragraph 53(c) relates.
56 If right-of-use assets meet the definition of investment property, a lessee shall apply the disclosure requirements in AASB 140. In that case, a lessee is not required to provide the disclosures in paragraph 53(a), (f), (h) or (j) for those right-of-use assets.
57 If a lessee measures right-of-use assets at revalued amounts applying AASB 116, the lessee shall disclose the information required by paragraph 77 of AASB 116 for those right-of-use assets.
58 A lessee shall disclose a maturity analysis of lease liabilities applying paragraphs 39 and B11 of AASB 7 Financial Instruments: Disclosures separately from the maturity analyses of other financial liabilities.
59 In addition to the disclosures required in paragraphs 53–58, a lessee shall disclose additional qualitative and quantitative information about its leasing activities necessary to meet the disclosure objective in paragraph 51 (as described in paragraph B48). This additional information may include, but is not limited to, information that helps users of financial statements to assess:
(a) the nature of the lessee’s leasing activities;
(b) future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. This includes exposure arising from:
(i) variable lease payments (as described in paragraph B49);
(ii) extension options and termination options (as described in paragraph B50);
(iii) residual value guarantees (as described in paragraph B51); and
(iv) leases not yet commenced to which the lessee is committed.
(c) restrictions or covenants imposed by leases; and
(d) sale and leaseback transactions (as described in paragraph B52).
Aus59.1 In addition to the disclosures required in paragraphs 53–59, where a lessee is a not-for-profit entity and elects to measure a class or classes of right-of-use assets at initial recognition at cost in accordance with paragraphs 23–25 for leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives, the lessee shall disclose additional qualitative and quantitative information about those leases necessary to meet the disclosure objective in paragraph 51. This additional information shall include, but is not limited to, information that helps users of financial statements to assess:
(a) the entity’s dependence on leases that have significantly below-market terms and conditions principally to enable the entity to further its objectives; and
(b) the nature and terms of the leases, including:
(i) the lease payments;
(ii) the lease term;
(iii) a description of the underlying assets; and
(iv) restrictions on the use of the underlying assets specific to the entity.
Aus59.2 The disclosures provided by a not‑for‑profit entity in accordance with paragraph Aus59.1 shall be provided individually for each material lease that has significantly below-market terms and conditions principally to enable the entity to further its objectives or in aggregate for leases involving right-of-use assets of a similar nature. An entity shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.
60
A lessee that accounts for short-term leases or leases of low-value assets applying paragraph 6 shall disclose that fact.
60 A lessee that accounts for short-term leases or leases of low-value assets applying paragraph 6 shall disclose that fact.
60A
If a lessee applies the practical expedient in paragraph 46A, the lessee shall disclose:
60A If a lessee applies the practical expedient in paragraph 46A, the lessee shall disclose:
(a) that it has applied the practical expedient to all rent concessions that meet the conditions in paragraph 46B or, if not applied to all such rent concessions, information about the nature of the contracts to which it has applied the practical expedient (see paragraph 2); and
(b) the amount recognised in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient in paragraph 46A.
Classification of leases (paragraphs B53–B58)
61
A lessor shall classify each of its leases as either an operating lease or a finance lease.
61 A lessor shall classify each of its leases as either an operating lease or a finance lease.
62 A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
63 Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are:
(a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
(b) the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised;
(c) the lease term is for the major part of the economic life of the underlying asset even if title is not transferred;
(d) at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and
(e) the underlying asset is of such a specialised nature that only the lessee can use it without major modifications.
64 Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are:
(a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee;
(b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equaling most of the sales proceeds at the end of the lease); and
(c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.
65 The examples and indicators in paragraphs 63–64 are not always conclusive. If it is clear from other features that the lease does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset, the lease is classified as an operating lease. For example, this may be the case if ownership of the underlying asset transfers at the end of the lease for a variable payment equal to its then fair value, or if there are variable lease payments, as a result of which the lessor does not transfer substantially all such risks and rewards.
66 Lease classification is made at the inception date and is reassessed only if there is a lease modification. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the underlying asset), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes.
Recognition and measurement
67 At the commencement date, a lessor shall recognise assets held under a finance lease in its statement of financial position and present them as a receivable at an amount equal to the net investment in the lease.
68 The lessor shall use the interest rate implicit in the lease to measure the net investment in the lease. In the case of a sublease, if the interest rate implicit in the sublease cannot be readily determined, an intermediate lessor may use the discount rate used for the head lease (adjusted for any initial direct costs associated with the sublease) to measure the net investment in the sublease.
69 Initial direct costs, other than those incurred by manufacturer or dealer lessors, are included in the initial measurement of the net investment in the lease and reduce the amount of income recognised over the lease term. The interest rate implicit in the lease is defined in such a way that the initial direct costs are included automatically in the net investment in the lease; there is no need to add them separately.
Initial measurement of the lease payments included in the net investment in the lease
70 At the commencement date, the lease payments included in the measurement of the net investment in the lease comprise the following payments for the right to use the underlying asset during the lease term that are not received at the commencement date:
(a) fixed payments (including in-substance fixed payments as described in paragraph B42), less any lease incentives payable;
(b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date;
(c) any residual value guarantees provided to the lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee;
(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option (assessed considering the factors described in paragraph B37); and
(e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
Manufacturer or dealer lessors
71
At the commencement date, a manufacturer or dealer lessor shall recognise the following for each of its finance leases:
71 At the commencement date, a manufacturer or dealer lessor shall recognise the following for each of its finance leases:
(a) revenue being the fair value of the underlying asset, or, if lower, the present value of the lease payments accruing to the lessor, discounted using a market rate of interest;
(b) the cost of sale being the cost, or carrying amount if different, of the underlying asset less the present value of the unguaranteed residual value; and
(c) selling profit or loss (being the difference between revenue and the cost of sale) in accordance with its policy for outright sales to which AASB 15 applies. A manufacturer or dealer lessor shall recognise selling profit or loss on a finance lease at the commencement date, regardless of whether the lessor transfers the underlying asset as described in AASB 15.
72 Manufacturers or dealers often offer to customers the choice of either buying or leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to profit or loss equivalent to the profit or loss resulting from an outright sale of the underlying asset, at normal selling prices, reflecting any applicable volume or trade discounts.
73 Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers. The use of such a rate would result in a lessor recognising an excessive portion of the total income from the transaction at the commencement date. If artificially low rates of interest are quoted, a manufacturer or dealer lessor shall restrict selling profit to that which would apply if a market rate of interest were charged.
74 A manufacturer or dealer lessor shall recognise as an expense costs incurred in connection with obtaining a finance lease at the commencement date because they are mainly related to earning the manufacturer or dealer’s selling profit. Costs incurred by manufacturer or dealer lessors in connection with obtaining a finance lease are excluded from the definition of initial direct costs and, thus, are excluded from the net investment in the lease.
75 A lessor shall recognise finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.
76 A lessor aims to allocate finance income over the lease term on a systematic and rational basis. A lessor shall apply the lease payments relating to the period against the gross investment in the lease to reduce both the principal and the unearned finance income.
77 A lessor shall apply the derecognition and impairment requirements in AASB 9 to the net investment in the lease. A lessor shall review regularly estimated unguaranteed residual values used in computing the gross investment in the lease. If there has been a reduction in the estimated unguaranteed residual value, the lessor shall revise the income allocation over the lease term and recognise immediately any reduction in respect of amounts accrued.
78 A lessor that classifies an asset under a finance lease as held for sale (or includes it in a disposal group that is classified as held for sale) applying AASB 5 Non-current Assets Held for Sale and Discontinued Operations shall account for the asset in accordance with that Standard.
79
A lessor shall account for a modification to a finance lease as a separate lease if both:
79 A lessor shall account for a modification to a finance lease as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract.
80 For a modification to a finance lease that is not accounted for as a separate lease, a lessor shall account for the modification as follows:
(a) if the lease would have been classified as an operating lease had the modification been in effect at the inception date, the lessor shall:
(i) account for the lease modification as a new lease from the effective date of the modification; and
(ii) measure the carrying amount of the underlying asset as the net investment in the lease immediately before the effective date of the lease modification.
(b) otherwise, the lessor shall apply the requirements of AASB 9.
Recognition and measurement
81 A lessor shall recognise lease payments from operating leases as income on either a straight-line basis or another systematic basis. The lessor shall apply another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished.
82
A lessor shall recognise costs, including depreciation, incurred in earning the lease income as an expense.
82 A lessor shall recognise costs, including depreciation, incurred in earning the lease income as an expense.
83 A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount of the underlying asset and recognise those costs as an expense over the lease term on the same basis as the lease income.
84 The depreciation policy for depreciable underlying assets subject to operating leases shall be consistent with the lessor’s normal depreciation policy for similar assets. A lessor shall calculate depreciation in accordance with AASB 116 and AASB 138.
85 A lessor shall apply AASB 136 to determine whether an underlying asset subject to an operating lease is impaired and to account for any impairment loss identified.
86 A manufacturer or dealer lessor does not recognise any selling profit on entering into an operating lease because it is not the equivalent of a sale.
87 A lessor shall account for a modification to an operating lease as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease.
Presentation
88 A lessor shall present underlying assets subject to operating leases in its statement of financial position according to the nature of the underlying asset.
89 The objective of the disclosures is for lessors to disclose information in the notes that, together with the information provided in the statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of the lessor. Paragraphs 90–97 specify requirements on how to meet this objective.
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Source text: opening excerpt
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
This compiled Standard applies to annual periods beginning on or after 1 January 2024. Earlier application is permitted for annual periods beginning before 1 January 2024. It incorporates relevant amendments made up to and including 10 November 2022.
Prepared on 18 December 2023 by the staff of the Australian Accounting Standards Board.
Compilation no. 8
Compilation date: 31 December 2023
Obtaining copies of Accounting Standards
Compiled versions of Standards, original Standards and amending Standards (see Compilation Details) are available on the AASB website: www.aasb.gov.au.
This compiled AASB Standard contains IFRS Foundation copyright material. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The Managing Director, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007.
All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce IFRS Foundation copyright material for commercial purposes outside Australia should be addressed to the IFRS Foundation at www.ifrs.org.
The instrument is an Accounting Standard made by the AASB under section 334 of the Corporations Act 2001 (publication details). The compiled version provided here incorporates amendments up to 10 November 2022 and, as compiled, applies to annual periods beginning on or after 1 January 2024 (compilation details; Appendix C). Earlier application is permitted in a range of circumstances (C1 and table of Standards).
The Basis for Conclusions material appended to the Standard records the AASB’s policy reasoning on issues such as concessionary leases for not-for-profit entities, public sector measurement choices and practical expedients introduced for Covid-19 rent concessions and interest rate benchmark reform (Basis for Conclusions sections).
Main concepts
Right-of-use asset and lease liability. The core accounting mechanics for lessees are the recognition of a right-of-use asset (a representation of the lessee’s right to use the underlying asset) and a lease liability (the present value of unpaid lease payments) at the commencement date (s22-26; Appendix A definitions). The right-of-use asset initial cost includes the initial measurement of the lease liability, any lease payments made at or before commencement (less incentives), initial direct costs, and certain restoration obligations (s23-25).
Lease payments. The lease liability bases on the present value of lease payments not paid at commencement and includes fixed payments (including in-substance fixed payments), variable payments indexed to an index or rate (measured at the index/rate at commencement), amounts under residual value guarantees, exercise prices of purchase options if reasonably certain to be exercised, and termination penalties if the lease term reflects exercising an option to terminate (s27-28; B42 clarifies in-substance fixed payments).
Identifying a lease. A contract conveys a lease if it conveys the right to control use of an identified asset for a period of time (s9-11). Appendix B provides detailed guidance on identification, including “substantive substitution rights” (B14-B19), portions of assets, right to obtain economic benefits (B21-B23) and right to direct use (B24-B30). The assessment is made at inception and is reassessed only if contract terms change (s11).
Separating components and practical expedients. The Standard requires separation of lease and non-lease components and allocation of consideration on relative stand‑alone prices (s12-16). Lessees may elect a practical expedient by class of underlying asset not to separate lease and non-lease components (s15). Lessees may also apply portfolio approaches for similar leases (B1).
Lease term and optional periods. Lease term is the non-cancellable period plus periods covered by options to extend (if reasonably certain to be exercised) and options to terminate (if reasonably certain not to be exercised) (s18-21; B34-B41 provides detailed factors for assessing “reasonably certain,” eg economic incentives, leasehold improvements, dependence on asset). Reassessment of those judgments occurs only upon specified events or changes in circumstances (s20; B41).
Subsequent measurement and remeasurement. Lessees apply the cost model, unless electing revaluation/fair value models where applicable (s29-35; Aus35.1 for some public sector entities). The lease liability is subsequently increased for interest, reduced for payments, and remeasured for changes in lease payments (s36-43). Remeasurement mechanics depend on the nature of change and may require revised discount rates (s40-43).
Lease modifications and concessions. Modifications that increase scope and consideration commensurate with stand-alone prices are separate leases; other modifications require allocation and remeasurement rules (s44-46). The Standard includes a Covid-19-related practical expedient allowing lessees not to assess certain rent concessions as lease modifications (s46A-46B), with disclosure requirements where the expedient is used (s60A).
Lessor accounting and classification. Lessors classify leases as finance or operating leases and apply separate measurement rules (s61-97). Classification depends on whether substantially all the risks and rewards incidental to ownership transfer (s62-66). Manufacturer or dealer lessors have special treatment and constraints on quoted interest rates and selling profit recognition (s71-74).
Sale and leaseback. The Standard aligns determination of whether a transfer is a sale with AASB 15 performance obligation satisfaction and prescribes measurement adjustments where sale consideration is not at fair value or payments not at market rates (s98-103; 102A added by amendment).
Disclosure objective. The Standard’s disclosure objective requires lessees and lessors to disclose enough information to enable users to assess leases’ effects on financial position, performance and cash flows (s1; s51; s89), with specific line-item and tabular disclosure requirements (s47-60; s90-97). Tier 2 simplified disclosures are set out in Appendix E (AusE1).
Who it affects
Reporting entities with lease contracts. All entities that enter leases are affected: lessees must, with limited exceptions, recognise right-of-use assets and lease liabilities (s3; s22-26). Lessors continue to classify leases as finance or operating and provide corresponding accounting and disclosures (s61-97).
Not-for-profit entities. The Standard contains Australian-specific paragraphs addressing not-for-profit entities. Not-for-profit lessees may elect to measure right-of-use assets arising under concessionary leases (significantly below-market terms principally to enable objectives) at initial recognition at fair value under AASB 13, or elect cost measurement (Aus25.1-Aus25.2). Additional disclosure requirements apply where not-for-profit entities elect cost treatment (Aus59.1-Aus59.2). The Basis for Conclusions documents the AASB’s reasoning and the ongoing optional status for private-sector not-for-profits (Basis for Conclusions BC2-BC16).
Public sector and Whole of Government considerations. The Standard and its amendments acknowledge government reporting contexts. AASB 1049 interactions and Aus35.1 provide a mechanism for certain not-for-profit public sector entities to elect fair value or cost for classes of right-of-use assets when they apply the revaluation model under AASB 116 (Aus35.1; Basis for Conclusions BC7-BC13). The AASB also has made adjustments recognising tension with Government Finance Statistics and public-sector reporting practices (Basis for Conclusions BC5-BC12).
Tiered reporting. The Standard distinguishes Tier 1 (full GPFS) and Tier 2 (simplified disclosures) preparers. For-profit Tier 1 entities complying with AASB 16 will also comply with IFRS 16; Tier 2 entities that prepare general purpose financial statements under the Simplified Disclosures framework will not be in compliance with IFRS (Comparison with IFRS 16 section; Appendix E AusE1).
Users of financial statements. External stakeholders who rely on financial statements , auditors, investors, lenders, grantors, treasury departments, credit analysts and board members , are affected indirectly: the Standard materially changes balance-sheet presentation for lessees, which affects ratios, covenants and credit assessments (s47-50; s53 disclosure items).
Contract counterparties and negotiators. Parties negotiating contracts (lessors, suppliers, lessees) will face stronger incentives to draft terms that alter accounting outcomes, for example structuring payments to be excluded from lease payments or to change lease classification. The Standard’s tests for lease identification and in-substance fixed payments (s9; B42) increase the importance of contract drafting and forecasting.
Auditors and preparers. Management is responsible for initial identification, classification and measurement judgments (s2; s9; s18-21) and for electing practical expedients (s5; s15; C10). Auditors will need to test judgments such as “reasonably certain” for options, discount rates used (s26, s41), and, where applicable, fair value measurements and disclosures (s29-36; Aus25.1).
Transition and systems. Entities with legacy lease portfolios, large numbers of embedded leases, or complex variable payments (s27-28; B42) will need systems and processes to gather contractual data, calculate incremental borrowing rates, discount cash flows, and produce expanded disclosures (s51-60). Entities planning early adoption must observe cross-application requirements with AASB 15 and related amendments (C1).
Key duties and rights
Primary duties of lessees. At lease commencement, lessees must recognise a right-of-use asset and a lease liability (s22). Lessees must measure the right-of-use asset at cost, including the initial measurement of the lease liability, prepaid lease payments and initial direct costs (s23-25). Lessees must measure the lease liability at the present value of unpaid lease payments using an appropriate discount rate (s26-28). Lessees must apply subsequent measurement rules, depreciate the right-of-use asset in accordance with AASB 116 (s31-33), apply impairment rules (s33), and account for interest and variable lease payments in profit or loss (s37-38).
Lessee choices and elections. Lessees may elect not to apply the full recognition model to short-term leases and leases of low-value assets; if elected, lease payments are expensed (s5-8; B3-B8). Lessees may elect the practical expedient not to separate non-lease components from lease components by class of underlying asset (s15). Lessees can apply cost, fair value (for investment property under AASB 140) or revaluation models where relevant (s29-35). Practical expedients exist for transition (C10) and for not assessing certain Covid-19 rent concessions as lease modifications (s46A-46B).
Lessee disclosure duties. Lessees must disclose significant quantitative and qualitative information about leasing activities in a single note or section (s52-60A). Required amounts include depreciation by class, interest on lease liabilities, cash outflows, additions to right-of-use assets, carrying amounts by class, and more (s53).
Primary duties of lessors. Lessors must classify each lease as finance or operating (s61-66) and apply the appropriate recognition and measurement rules. For finance leases, lessors recognise a receivable equal to the net investment in the lease and allocate income over the lease term (s67-77). For operating leases, lessors recognise lease income on a systematic basis and treat initial direct costs as part of the underlying asset (s81-86).
Lessor disclosure duties. Lessors must disclose selling profit, finance income and income related to variable lease payments for finance leases, and lease income for operating leases, with tabular or appropriate format disclosure (s90-97). Lessors must provide maturity analyses for payments receivable (s94; s97).
Contractual rights and measurement consequences. The Standard sets out specific rights and measurement consequences: rights to extend or terminate affect lease term and liability measurement (s18-21; s39-41). Rights or obligations to substitute the asset can prevent a contract from being a lease (B14-B19). Rights to variable payments depend on future events and may not be included in lease liabilities unless linked to an index or rate (s27-28; B42).
Modification and reassessment duties. Parties must apply the Standard’s modification accounting when scope or consideration changes (s44-46). Remeasurement mechanics require adjustment of the lease liability, often with corresponding adjustments to the right-of-use asset, or recognition in profit or loss when the right-of-use asset is reduced to zero (s39-46).
Transition and disclosure choices. Entities must choose a transition method (retrospective restatement or cumulative catch-up at date of initial application) and apply consistent elections (C5-C13). Lessees must disclose transition choices and weighted average incremental borrowing rates where the cumulative-effect approach is used (C12-C13).
Legal status and hierarchy. The Standard is issued by the AASB under s334 of the Corporations Act 2001 and forms part of the statutory accounting framework; it is to be read with other Australian Accounting Standards (front matter).
Penalties and enforcement
The Standard itself does not prescribe penalties or enforcement mechanisms. The document records that the AASB made AASB 16 under section 334 of the Corporations Act 2001 (publication note). The Standard is an Accounting Standard within the structure of Australian Accounting Standards and is intended to be applied by entities preparing financial statements in accordance with those Standards (front matter; references to AASB 1048 and AASB 1057).
Consequences for non‑compliance are not set out in the text of AASB 16. Enforcement and sanctioning mechanisms, including any penalties or regulatory actions for failure to apply Accounting Standards, lie outside the Standard itself and are a function of the Corporations Act, related regulation and oversight arrangements that are not described in AASB 16. The Standard repeatedly instructs preparers to read it in the context of other Standards (for example, AASB 1048 and AASB 1057) and to apply related Standards for specific measurement and disclosure requirements (front matter; numerous cross-references).
Practical compliance risk and control implications (source-grounded). Because the Standard changes balance-sheet recognition for lessees and expands disclosure obligations (s22-26; s51-60), the immediate enforcement risks for entities are reputational, audit qualifications and regulatory scrutiny where financial statements are not prepared in accordance with applicable Accounting Standards. The Standard includes specific transition disclosure requirements where entities elect the cumulative adjustment approach (C12), and practical expedients that require disclosure when used (C13; s60A). Failure to make required disclosures may be identified in audit reports and by users; AASB 16 itself does not set out civil or criminal sanction regimes.
Users should therefore treat the Standard as a binding accounting requirement within the statutory regime; the Standard identifies required measurement, presentation and disclosure outcomes (for example, separate presentation or disclosure of right‑of‑use assets and lease liabilities, s47-49) and transitional disclosures (C12). Entities must integrate the Standard’s requirements into governance, accounting policies and audit evidence to manage compliance risk.
How it interacts with other laws
Interaction with other Australian Accounting Standards. The Standard explicitly requires application in the context of other Australian Accounting Standards and identifies multiple cross-references. It directs preparers to read AASB 16 together with AASB 1048 Interpretation of Standards and AASB 1057 Application of Australian Accounting Standards (front matter). It integrates with measurement and presentation Standards: AASB 13 Fair Value Measurement (for certain fair value options and not-for-profit concessionary leases, Aus25.1), AASB 15 Revenue from Contracts with Customers (sale and leaseback transactions, s99-103), AASB 116 Property, Plant and Equipment (depreciation and revaluation model for right-of-use assets, s31-35), AASB 136 Impairment of Assets (s33), AASB 140 Investment Property (s34; presentation exceptions in s48), AASB 102 Inventories and AASB 137 (s25), and AASB 9 Financial Instruments for lessor derecognition and impairment of net investment in finance leases (s77).
Corporations Act and statutory status. The Standard was made under s334 of the Corporations Act 2001 (publication note). That gives it a statutory position within financial reporting obligations for entities governed by the Corporations Act, but the Standard itself does not restate the Corporations Act enforcement provisions. Preparers should ensure application in the legal reporting context that requires compliance with applicable Accounting Standards.
Government reporting and GFS. The Basis for Conclusions discusses Government Finance Statistics (GFS) and Whole of Government issues, noting that public sector entities apply AASB 1049 and that the AASB provided specific temporary relief and options for public-sector contexts to address GFS convergence challenges (Basis for Conclusions on AASB 2019-8 BC5-BC13). Aus35.1 and related AusC provisions reflect these public sector considerations, permitting certain not-for-profit public sector entities to elect cost or fair value revaluation treatments for classes of right-of-use assets.
Covid-19 rent concessions and interest rate benchmark reform. The Standard includes targeted, time‑limited practical expedients responding to market events: Covid-19-related rent concession relief allowing lessees not to assess certain rent concessions as lease modifications (s46A-46B; C1A; C20A-C20BC) and temporary exception rules for interest rate benchmark reform that affect the basis for determining future lease payments (s104-106; C1B; C20C-C20D). These interact with AASB 9 and related Standards and are constrained to the specific economic events described.
Sale and leaseback and financing interplay. Sale and leaseback accounting requires application of AASB 15 to determine whether a transfer is a sale (s98-103). Where transfers are not sales, the parties recognise financial instruments under AASB 9 rather than the asset transfer (s103). The 2022 amendment added paragraph 102A and related transition text (C20E) to address lease liabilities arising in sale and leaseback transactions.
Tax and statutory law. AASB 16 does not address taxation or other statutory consequences of leasing on legal title, stamp duty, GST or similar matters; those interactions must be assessed against tax law and other statutory regimes outside the Standard. The Standard does not substitute for legal or tax advice.
Amendment history
The compiled Standard incorporates amendments up to 10 November 2022 (compilation details). Key Australian amendments and thematic changes in the compilation include:
AASB 16 original issuance, made under s334 of the Corporations Act on 23 February 2016; effective for annual reporting periods beginning on or after 1 January 2019 (Accounting Standard AASB 16; C1; compilation table).
Concessionary leases for not-for-profit entities: AASB 2018-8 introduced Aus25.1 and Aus25.2 to permit not-for-profit entities to elect to measure right-of-use assets arising under concessionary leases at cost instead of fair value at initial recognition; AASB 2019-8 further clarified that such right-of-use assets may be treated as a separate class and extended relief for public-sector subsequent measurement (Aus25.1, Aus25.2, Aus35.1; Basis for Conclusions BC1-BC21).
Covid-19 rent concessions: AASB 2020-4 added paragraphs 46A, 46B and 60A to provide a practical expedient for lessees not to assess certain Covid‑19-related rent concessions as lease modifications and to require related disclosures; later amended by AASB 2021-3 to extend applicability beyond 30 June 2021 (C1A; C1C; C20A-C20BC).
Interest rate benchmark reform: AASB 2020-8 added paragraphs 104-106 providing a temporary exception for lease modifications required by IBOR reform and related transition relief (C1B; C20C-C20D).
Sale and leaseback: AASB 2022-5 amended the Standard to add paragraph 102A and adjusted transition guidance for the lease liability in sale and leaseback transactions; these amendments are effective for annual reporting periods beginning on or after 1 January 2024 (C1D; C20E).
Tiered reporting and simplified disclosures: AASB 1060 and amendments established Appendix E (AusE1) to set Australian simplified disclosures for Tier 2 entities, exempting Tier 2 entities from certain disclosure paragraphs (AusE1).
Compilation table and Table of amendments at the end of the Standard lists numerous other amendments and their dates, including AASB 2018-3, AASB 2018-4, AASB 2019-2, AASB 2019-8, AASB 2020-7, AASB 2021-3, AASB 2021-7 and AASB 2022-5 (Compilation details and table).
Appendix C records effective dates and transition mechanics including paragraphs C1-C1D outlining effective dates for subsequent amendments, and C2-C20E setting out transition options, practical expedients and elected treatments for legacy leases. The Table of amendments provides a paragraph-by-paragraph map of how the Standard was changed.
The Basis for Conclusions sections appended to the Standard record the AASB’s deliberations for AASB 2018-8, AASB 2019-8, AASB 2022-3 and AASB 2022-5, which clarify the policy trade-offs and reasons behind temporary options, public-sector relief and illustrative example changes (Basis for Conclusions).
Litigation history
The Standard and its compilation do not cite any judicial or administrative decisions. The text contains no references to litigation, case law, or enforcement decisions. The appended Basis for Conclusions discusses policy responses and stakeholder feedback but does not reference legal disputes.
Practitioners should therefore not expect precedent citations within the Standard itself. Application issues and disputes about accounting interpretation are typically resolved through regulatory review, audit processes, professional practice guidance and, where necessary, legal proceedings outside the Standard. The Standard does not record any litigation history or reported decisions applying AASB 16.
If parties anticipate disputes about classification, measurement or contract interpretation (for example, whether a contract contains a lease under s9 and Appendix B guidance), those disputes will be governed by contract law and regulatory/accounting oversight in the relevant jurisdiction. The Standard provides authoritative accounting outcomes but does not create adjudicative mechanisms or catalogue prior judicial interpretations.
Gotchas
Identifying a lease is facts-dependent. The threshold question , whether a contract conveys the right to control an identified asset for a period in exchange for consideration , looks simple in the Standard (s9) but Appendix B contains granular guidance on substantive substitution rights (B14-B19), capacity portions (B20), and decision‑making rights (B24-B30). Contracts that specify an asset but allow the supplier substantive substitution can escape lease accounting. The practical consequence is that both legal drafting and operational arrangements materially affect accounting outcomes.
In-substance fixed payments can be disguised. Paragraph B42 treats payments that are variable in form but unavoidable in substance as in-substance fixed payments and therefore part of lease payments. Examples include variable clauses with no real economic variability or multiple payment sets where only one is realistic. Parties that attempt to structure variability to avoid balance-sheet recognition may not succeed.
Election by class creates aggregation choices and comparability friction. Practical expedients are by class of underlying asset (s5; s8; s15). Choosing classes requires judgement about “similar nature and use” and may create comparability issues within an entity and across entities. Aus25.2 permits concessionary right-of-use assets to be treated as a separate class for not-for-profits, an exception to normal class concepts.
Lease term and options are forward-looking and reassessments are limited. The determination of “reasonably certain” to exercise extension or termination options requires consideration of economic incentives (s18-21; B37-B41). Reassessments are triggered only by significant events or changes in circumstances within the lessee’s control (s20; B41). Over- or under-estimating option exercise likelihood changes liability measurements and periodic expense recognition.
Discount rate choice and estimation complexity. Lessees must use the interest rate implicit in the lease if readily determinable, otherwise the incremental borrowing rate (s26). Estimating incremental borrowing rates for numerous leases with different terms and securities is operationally demanding and open to audit challenge.
Separating lease and non-lease components may be difficult when observable stand-alone prices lack. Allocation requires relative stand-alone prices (s13-14). Where observable prices are not readily available, lessees must estimate them, maximising observable information. The s15 practical expedient can simplify accounting but requires class elections and has disclosure implications.
Transition practical expedients have traps. The Standard allows either full retrospective application or a cumulative-effect approach with practical expedients (C5-C13). Applying practical expedients inconsistently or failing to disclose chosen expedients (C13) may result in audit findings. For lessees, C8(b) allows a choice for measurement of right-of-use assets on transition that materially affects opening balances.
Covid-19 practical expedient is limited and requires disclosure. The concession applies only where the rent concession meets specific conditions and only to rent concessions arising as a direct consequence of the pandemic (s46A-46B). If applied, paragraph 60A requires disclosure of the election and amounts recognised, and the lessee must apply the expedient consistently to eligible contracts with similar characteristics (C20BC).
Sale and leaseback adjustments and potential double-counting. Assessing whether a transfer is a sale uses AASB 15 (s99-100). Where sale consideration differs from fair value, adjustments are required (s101-102). The 2022 amendment (102A and C20E) adjusts how seller-lessees measure right-of-use assets and lease liabilities to prevent recognition of gain related to retained rights. Failure to apply these rules precisely can misstate gains or liabilities.
Not-for-profit concessionary lease options. Aus25.1-Aus25.2 allow not-for-profit entities to elect cost measurement at initial recognition for concessionary leases. That election can materially affect reported assets and income recognition and is subject to additional disclosure requirements (Aus59.1-Aus59.2). Entities must track which leases are concessionary and the election by class.
Lessors: classification judgment persists. Lessors remain subject to the classic finance vs operating test (s62-66). Allocation between land and buildings and special cases (B55-B57) require judgment, and misclassification affects income timing and asset presentation.
Disclosure burden and aggregation choices. The Standard mandates specific tabular disclosures and maturity analyses (s53-59 for lessees; s90-97 for lessors). Tier 2 relief applies to many smaller entities (AusE1) but entities must still consider qualitative disclosures (B48-B52). Deciding aggregation levels to avoid obscuring meaningful differences is a judgement with audit implications.
How to comply
Inventory and scoping. Begin with a complete inventory of contracts (existing and new) to determine which convey leases under s9 and Appendix B. Apply the practical expedient in C3 only if you accept its scope for transition. For contracts entered before initial application, decide which transition approach in C5 to use (full retrospective or cumulative effect). Document the decision and disclose it (C12).
Policy decisions and elections. Determine and document policy elections early:
Short-term and low‑value exemptions by class or lease-by-lease as permitted (s5-8; B3-B8).
Practical expedient not to separate lease and non-lease components by class (s15).
Transition practical expedients in C10 (single discount rate portfolios, onerous lease reliance, short-term lease election, exclusion of initial direct costs, use of hindsight).
For not-for-profit entities, decide whether to elect cost or fair value for concessionary leases at initial recognition by class (Aus25.1-Aus25.2), and document additional disclosure decisions (Aus59.1-Aus59.2).
Decide on application of revaluation or fair value for right-of-use assets where applicable (s34-35; Aus35.1).
Data and systems. Build or adapt systems to capture the necessary contract data: commencement dates, payment schedules (including index-linked payments), options, residual value guarantees, initial direct costs, and restoration obligations (s23-28; B42). Ensure capability to compute incremental borrowing rates for different term and security profiles (s26; s41) and to remeasure liabilities when contract terms change (s36-43).
Judgement frameworks. Establish a governance framework for key judgments:
Lease identification and separation (s9-16; B9-B33).
Determining lease term and assessing “reasonably certain” for options (s18-21; B37-B41).
Determining in-substance fixed payments (B42).
Selecting discount rates and assessing the rate implicit in the lease (s26; s41).
Classifying lessor leases as finance or operating (s61-66; B53-B57).
Measurement and accounting. Apply the measurement mechanics:
At commencement, measure ROU asset at cost and lease liability at present value of unpaid lease payments (s23-26).
Depreciate the right-of-use asset per AASB 116 requirements subject to lease-specific rules (s31-33).
Recognise interest on lease liabilities and variable lease payments in profit or loss (s37-38).
Remeasure liabilities and adjust right-of-use assets for changes in lease term, exercise of purchase options, residual value changes, and index-linked payments per s39-43; use revised discount rates where required (s40-41, s43).
For lease modifications, apply s44-46 to determine separate lease treatment or remeasurement and the accounting effects.
Presentation and disclosure. Ensure financial statement presentation complies with s47-50: present or disclose ROU assets and lease liabilities separately, show interest expense separately from depreciation in profit or loss (s49), and classify cash flows for principal and interest appropriately (s50). Prepare the mandatory disclosures set out in s51-60 (lessees) and s89-97 (lessors), including tabular formats and maturity analyses (s54; s58; s94). For Covid‑19 practical expedient use, follow s46A and disclose as required in s60A.
Transition execution. For entities adopting the cumulative-effect approach (C5(b)), measure liabilities at the present value of remaining lease payments discounted at incremental borrowing rate at the date of initial application (C8(a)), and choose the permitted method for right-of-use asset measurement per C8(b). Prepare and disclose the opening balance adjustments and weighted average incremental borrowing rate per C12(a)-(b). If relying on practical expedients in C10, document and disclose their use (C13).
Operational controls and audit readiness. Implement internal controls to evidence judgments and inputs for discount rates, option assessments, and variable payment forecasts. Coordinate with auditors early about model assumptions, data completeness and disclosure formats. Where fair value measurement is elected or required (investment property or concessionary leases at fair value), obtain appropriate valuation expertise and document valuation models in accordance with AASB 13 (s34; Aus25.1).
Monitoring and updates. Monitor amendments and interpretative guidance (the Standard lists key amendments and provides Basis for Conclusions). Keep track of market changes triggering IBOR replacement rules (s104-106) and policy actions affecting rent concessions or other temporary measures (C1A-C1C; C20A-C20D). Reassess lease terms and remeasure when contract changes occur or when significant events within the lessee’s control affect option likelihood (s20; B41).
Who decides and who pays. Entity management (finance, legal and procurement) decides on classification, elections and judgments. The lessee ultimately records the asset and liability, bears increased balance-sheet recognition and associated depreciation and interest expense, and bears the implementation cost of systems, valuations and disclosures. Lessors decide on classification and recognition under the lessor model and bear the accounting consequences for receivables, income and residual risks.
Documentation and disclosures to users. Document the rationale for each material judgement, election and transition choice and include the required disclosures (s51-60; C12). Not-for-profit entities choosing cost for concessionary leases must include additional qualitative and quantitative information about dependence on such leases, their terms and restrictions (Aus59.1-Aus59.2).
Practical sequencing. Start with contract identification and classification, then assemble data for measurement, run a pilot on significant lease groups to test discount rate methodologies and disclosure formats, finalise policy elections, roll out systems and controls, and coordinate with auditors on evidence and presentation ahead of financial statement sign-off.
Subsequent measurement of the right-of-use asset 29
Subsequent measurement of the lease liability 36
Lease modifications 44
Presentation 47
Disclosure 51
Lessor
Classification of leases 61
Finance leases
Recognition and measurement 67
Initial measurement 68
Subsequent measurement 75
Operating leases
Recognition and measurement 81
Lease modifications 87
Presentation 88
Disclosure 89
Finance leases 93
Operating leases 95
Sale and leaseback transactions 98
Assessing whether the transfer of the asset is a sale 99
Transfer of the asset is a sale 100
Transfer of the asset is not a sale 103
Commencement of the legislative instrument
Temporary exception arising from interest rate benchmark reform 104
Appendices
A Defined terms
B Application guidance
C Effective date and transition
D Amendments to other Standards
E Australian simplified disclosures for Tier 2 entities
COMPILATION DETAILS
Deleted IFRS 16 text
basis for conclusions on AASB 2018-8
basis for conclusions on AASB 2019-8
basis for conclusions on AASB 2022-3
Available on the AASB website
Illustrative examples for IFRS 16
Basis for Conclusions on IFRS 16
Australian Accounting Standard AASB 16 Leases (as amended) is set out in paragraphs 1 – 106 and Appendices A – E. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the Standard. AASB 16 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations, and AASB 1057 Application of Australian Accounting Standards. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.
Comparison with IFRS 16
AASB 16 Leases as amended incorporates IFRS 16 Leases as issued and amended by the International Accounting Standards Board (IASB). Australian‑specific paragraphs (which are not included in IFRS 16) are identified with the prefix “Aus”. Paragraphs that apply only to not-for-profit entities begin by identifying their limited applicability.
Tier 1
For-profit entities complying with AASB 16 also comply with IFRS 16.
Not-for-profit entities’ compliance with IFRS 16 will depend on whether any “Aus” paragraphs that specifically apply to not-for-profit entities provide additional guidance or contain applicable requirements that are inconsistent with IFRS 16.
Tier 2
Entities preparing general purpose financial statements under Australian Accounting Standards – Simplified Disclosures (Tier 2) will not be in compliance with IFRS Standards.
AASB 1053 Application of Tiers of Australian Accounting Standards explains the two tiers of reporting requirements.
Accounting Standard AASB 16
The Australian Accounting Standards Board made Accounting Standard AASB 16 Leases under section 334 of the Corporations Act 2001 on 23 February 2016.
This compiled version of AASB 16 applies to annual periods beginning on or after 1 January 2024. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 10 November 2022 (see Compilation Details).
Accounting Standard AASB 16
Leases
Objective
1 This Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.
2 An entity shall consider the terms and conditions of contracts and all relevant facts and circumstances when applying this Standard. An entity shall apply this Standard consistently to contracts with similar characteristics and in similar circumstances.
Scope
3 An entity shall apply this Standard to all leases, including leases of right-of-use assets in a sublease, except for:
(a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
(b) leases of biological assets within the scope of AASB 141 Agriculture held by a lessee;
(c) service concession arrangements within the scope of Interpretation 12 Service Concession Arrangements as identified in AASB 1048 Interpretation of Standards;
(d) licences of intellectual property granted by a lessor within the scope of AASB 15 Revenue from Contracts with Customers; and
(e) rights held by a lessee under licensing agreements within the scope of AASB 138 Intangible Assets for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.
Aus3.1 This Standard does not apply to service concession assets recognised in accordance with AASB 1059 Service Concession Arrangements: Grantors.
Aus3.2 Notwithstanding paragraph 3, in respect of not-for-profit public sector licensors, this Standard also applies to licences that are in substance leases or contain leases, excluding licences of intellectual property. AASB 15 applies to licences of intellectual property. AASB 15 also applies to licences of non-intellectual property that, in substance, are not leases or do not contain leases.
4 A lessee may, but is not required to, apply this Standard to leases of intangible assets other than those described in paragraph 3(e).
Recognition exemptions (paragraphs B3–B8)
5 A lessee may elect not to apply the requirements in paragraphs 22–49 to:
(a) short-term leases; and
(b) leases for which the underlying asset is of low value (as described in paragraphs B3–B8).
6 If a lessee elects not to apply the requirements in paragraphs 22–49 to either short-term leases or leases for which the underlying asset is of low value, the lessee shall recognise the lease payments associated with those leases as an expense on either a straight-line basis over the lease term or another systematic basis. The lessee shall apply another systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
7 If a lessee accounts for short-term leases applying paragraph 6, the lessee shall consider the lease to be a new lease for the purposes of this Standard if:
(a) there is a lease modification; or
(b) there is any change in the lease term (for example, the lessee exercises an option not previously included in its determination of the lease term).
8 The election for short-term leases shall be made by class of underlying asset to which the right of use relates. A class of underlying asset is a grouping of underlying assets of a similar nature and use in an entity’s operations. The election for leases for which the underlying asset is of low value can be made on a lease-by-lease basis.
Identifying a lease (paragraphs B9–B33)
9 At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Paragraphs B9–B31 set out guidance on the assessment of whether a contract is, or contains, a lease.
10 A period of time may be described in terms of the amount of use of an identified asset (for example, the number of production units that an item of equipment will be used to produce).
11 An entity shall reassess whether a contract is, or contains, a lease only if the terms and conditions of the contract are changed.
Separating components of a contract
12 For a contract that is, or contains, a lease, an entity shall account for each lease component within the contract as a lease separately from non-lease components of the contract, unless the entity applies the practical expedient in paragraph 15. Paragraphs B32–B33 set out guidance on separating components of a contract.
Lessee
13 For a contract that contains a lease component and one or more additional lease or non-lease components, a lessee shall allocate the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.
14 The relative stand-alone price of lease and non-lease components shall be determined on the basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a similar component, separately. If an observable stand-alone price is not readily available, the lessee shall estimate the stand-alone price, maximising the use of observable information.
15 As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. A lessee shall not apply this practical expedient to embedded derivatives that meet the criteria in paragraph 4.3.3 of AASB 9 Financial Instruments.
16 Unless the practical expedient in paragraph 15 is applied, a lessee shall account for non-lease components applying other applicable Standards.
Lessor
17 For a contract that contains a lease component and one or more additional lease or non-lease components, a lessor shall allocate the consideration in the contract applying paragraphs 73–90 of AASB 15.
Lease term (paragraphs B34–B41)
18 An entity shall determine the lease term as the non-cancellable period of a lease, together with both:
(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option; and
(b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
19 In assessing whether a lessee is reasonably certain to exercise an option to extend a lease, or not to exercise an option to terminate a lease, an entity shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease, or not to exercise the option to terminate the lease, as described in paragraphs B37–B40.
20 A lessee shall reassess whether it is reasonably certain to exercise an extension option, or not to exercise a termination option, upon the occurrence of either a significant event or a significant change in circumstances that:
(a) is within the control of the lessee; and
(b) affects whether the lessee is reasonably certain to exercise an option not previously included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term (as described in paragraph B41).
21 An entity shall revise the lease term if there is a change in the non-cancellable period of a lease. For example, the non-cancellable period of a lease will change if:
(a) the lessee exercises an option not previously included in the entity’s determination of the lease term;
(b) the lessee does not exercise an option previously included in the entity’s determination of the lease term;
(c) an event occurs that contractually obliges the lessee to exercise an option not previously included in the entity’s determination of the lease term; or
(d) an event occurs that contractually prohibits the lessee from exercising an option previously included in the entity’s determination of the lease term.
Lessee
Recognition
22 At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.
Measurement
Initial measurement
Initial measurement of the right-of-use asset
23 At the commencement date, a lessee shall measure the right-of-use asset at cost.
24 The cost of the right-of-use asset shall comprise:
(a) the amount of the initial measurement of the lease liability, as described in paragraph 26;
(b) any lease payments made at or before the commencement date, less any lease incentives received;
(c) any initial direct costs incurred by the lessee; and
(d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period.
25 A lessee shall recognise the costs described in paragraph 24(d) as part of the cost of the right-of-use asset when it incurs an obligation for those costs. A lessee applies AASB 102 Inventories to costs that are incurred during a particular period as a consequence of having used the right-of-use asset to produce inventories during that period. The obligations for such costs accounted for applying this Standard or AASB 102 are recognised and measured applying AASB 137 Provisions, Contingent Liabilities and Contingent Assets.
Aus25.1 Notwithstanding paragraphs 23–25, where the lessee is a not-for-profit entity, the lessee may elect to measure right-of-use assets on a class‑by‑class basis at initial recognition at fair value in accordance with AASB 13 Fair
This is an opening excerpt, not the complete document.