What is IFRS 16?

IFRS 16 is the accounting standard for leases. It requires a lessee to recognise most leases on the balance sheet as a right-of-use asset and a lease liability, replacing the old distinction between operating and finance leases for lessees.

What goes on the balance sheet

The fixed lease payments over the term, reduced by any incentive such as a rent-free fit-out period, are discounted to a lease liability, with a matching right-of-use asset depreciated across the term. Rent leaves operating expenses and reappears as depreciation and interest — which raises reported EBITDA and adds a liability to the balance sheet.

What stays off it

• Variable payments based on sales — turnover rent is expensed as the triggering sales occur, not capitalised.
• Short-term leases of twelve months or less with no purchase option, where the exemption is elected.
• Low-value assets, where that exemption is elected.
• Non-lease components such as service charges, generally expensed — though a practical expedient allows them to be combined with the lease component if elected.

Why it matters commercially

Because EBITDA, gearing, and every covenant or valuation multiple calculated from those figures move when leases are capitalised. A retailer or a business with significant property commitments should understand the effect before a lender or a buyer explains it to them. A guaranteed minimum turnover rent is in substance fixed and belongs in the liability — a distinction worth checking clause by clause.

Reviewed 18 August 2026 by Ahmed Nabil Selim. UAE tax rates, thresholds and deadlines change — confirm the position for your period before relying on it.