IFRS 16 Leases, explained for small business owners

If your business rents an office, a warehouse, vehicles, or equipment, there's an accounting standard you should know about: IFRS 16, Leases. It changed how leases appear in financial statements — and it catches many small businesses by surprise.

The one-sentence version

Under IFRS 16, most leases go on your balance sheet as both an asset ("right-of-use asset") and a liability ("lease liability"). Rent is no longer just a monthly expense line.

What changed

Before IFRS 16, leases were split into two buckets:

• Finance leases — shown on the balance sheet.
• Operating leases — kept off the balance sheet, with rent hitting profit or loss each month.

Most small-business leases (offices, shops, vehicles) were operating leases, so they were effectively invisible on the balance sheet. IFRS 16 removed that distinction for lessees. Now, with limited exceptions, every lease longer than 12 months creates a right-of-use asset and a matching liability.

The exceptions

Two practical exemptions exist, and they matter for small businesses:

1. Short-term leases — 12 months or less, with no purchase option.
2. Low-value assets — items like laptops or small office equipment (the IASB suggests around $5,000 as a rule of thumb when new).

If your lease qualifies, you can keep the simple approach: recognise the payments as an expense.

Why it matters to you

• Your balance sheet gets bigger. Both assets and liabilities rise, which changes ratios like debt-to-equity. If you have bank covenants, check them.
• Your profit pattern shifts. Instead of flat rent expense, you now record depreciation plus interest — which is front-loaded. Early years of a lease show lower profit than the old method.
• EBITDA goes up. Rent used to sit above EBITDA; depreciation and interest sit below it. Your EBITDA improves even though nothing changed economically.

What to do about it

1. List every lease — offices, warehouses, vehicles, equipment. Include renewal options you're reasonably certain to exercise.
2. Measure the liability — the present value of future lease payments, discounted at your incremental borrowing rate.
3. Track it in your system — this is exactly the kind of thing accounting software should handle for you, not a spreadsheet you update once a year.

IFRS 16 isn't about making life harder. It's about showing the real obligations a business has signed up for. A balance sheet that hides your biggest monthly commitment was never telling the full story.

We're building Point to handle exactly this kind of accounting properly — leases, depreciation, and all — without needing an accounting degree to operate it. Join the waitlist.