IFRS 16 Disclosure Requirements — What Lessees and Lessors Must Include in the Notes

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Have You Ever Faced These Challenges?

• You prepared the IFRS 16 note by working through the disclosure checklist, only to be told by auditors that the qualitative disclosures on extension options lacked sufficient depth
• You were unsure whether to present the maturity analysis of lease liabilities on a discounted or undiscounted basis — or both
• As an intermediate lessor, you struggled to organise the note to distinguish your lessee disclosures from your lessor disclosures clearly

What You Will Learn From This Article

• The full scope of lessee disclosure requirements under IFRS 16 — income statement, balance sheet, cash flow, maturity analysis, and qualitative information
• How to prepare the maturity analysis of lease liabilities on an undiscounted basis and reconcile to the balance sheet figure
• Lessor disclosure requirements for finance leases, operating leases, and subleases

Who This Article Is For

• Finance professionals responsible for preparing IFRS 16 disclosures in annual reports and financial statements
• Those preparing IFRS 16 disclosures for the first time
• Intermediate lessors who need to organise both lessee and lessor disclosures in a single note

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The Disclosure Objective

The objective of the IFRS 16 disclosure requirements is to enable users of financial statements to assess the effect that leases have on the financial position, financial performance, and cash flows of the reporting entity (IFRS 16.51).

As with IFRS 15, this objective-based framing means that mechanically completing the disclosure checklist is necessary but not sufficient. A disclosure that lists the required items without providing genuine insight into how leases affect the entity’s finances does not satisfy the objective.

The areas where disclosure quality most frequently falls short — and where auditors and regulators focus their attention — are the qualitative explanations of extension option judgements and the explanation of significant changes in lease balances during the period.

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Lessee Disclosures

Income Statement Disclosures

IFRS 16.53 requires lessees to disclose the following amounts recognised in profit or loss:

Item	Description
Depreciation of right-of-use assets	By class of underlying asset
Interest expense on lease liabilities	Calculated using the effective interest method
Short-term lease expense	Where the short-term lease exemption has been applied
Low-value asset lease expense	Where the low-value asset exemption has been applied
Variable lease payments not in the lease liability	Expensed as incurred in the period
Income from subleasing right-of-use assets	Where applicable
Gains or losses on sale-and-leaseback transactions	Where applicable

Disclosure example:

Lease-related amounts recognised in profit or loss

                                          Current year    Prior year
                                          ¥m              ¥m
Depreciation of right-of-use assets
  Real estate                             x,xxx           x,xxx
  Vehicles                                x,xxx           x,xxx
  Other equipment                         x,xxx           x,xxx
  Total depreciation                      x,xxx           x,xxx

Interest expense on lease liabilities     x,xxx           x,xxx
Short-term lease expense                  x,xxx           x,xxx
Low-value asset lease expense             x,xxx           x,xxx
Variable lease payments (not in liability) x,xxx          x,xxx
Sublease income                           x,xxx           x,xxx

Balance Sheet Disclosures

The lessee discloses a roll-forward of right-of-use assets by class of underlying asset, showing the opening and closing carrying amounts and the movements during the period.

Disclosure example:

Right-of-use assets — movement during the year

                        Real estate  Vehicles  Other    Total
                        ¥m           ¥m        ¥m       ¥m
Opening carrying amount  x,xxx        x,xxx    x,xxx    x,xxx
Additions (new leases)   x,xxx        x,xxx    x,xxx    x,xxx
Lease modifications      x,xxx        x,xxx    x,xxx    x,xxx
Depreciation            (x,xxx)      (x,xxx)  (x,xxx)  (x,xxx)
Impairment              (x,xxx)       —        —       (x,xxx)
Closing carrying amount  x,xxx        x,xxx    x,xxx    x,xxx

Cash Flow Disclosures

IFRS 16.50 requires the lessee to present or disclose in the cash flow statement:

• Repayment of the principal portion of lease liabilities (financing activities)
• Interest paid on lease liabilities (financing or operating activities, per the entity’s accounting policy)
• Short-term lease payments (operating activities)
• Low-value asset lease payments (operating activities)
• Variable lease payments not included in the lease liability (operating activities)
• Total cash outflow for leases (as a single disclosure item, to provide a comprehensive view)

Maturity Analysis

IFRS 16.58 requires the lessee to present a maturity analysis of lease liabilities, showing the undiscounted contractual cash flows on a basis consistent with the maturity analysis required for financial liabilities under IFRS 7.

Critical point — undiscounted cash flows: The maturity analysis presents undiscounted future lease payments, not the discounted lease liability balance. A reconciliation between the total undiscounted amount and the carrying amount of the lease liability (the discounted amount) must be provided.

Disclosure example:

Maturity analysis of lease liabilities (undiscounted)

                                      Current year
                                      ¥m
Within 1 year                         x,xxx
Between 1 and 2 years                 x,xxx
Between 2 and 3 years                 x,xxx
Between 3 and 4 years                 x,xxx
Between 4 and 5 years                 x,xxx
More than 5 years                     x,xxx
Total undiscounted lease payments     x,xxx
Less: future finance charges          (x,xxx)
Lease liability (carrying amount)     x,xxx

The maturity analysis may be integrated with the maturity analysis of financial liabilities required by IFRS 7.39, provided the lease liabilities are clearly identified as a separate category.

Qualitative Disclosures

IFRS 16.59 requires the lessee to provide qualitative information that, together with the quantitative disclosures, gives users a complete picture of the entity’s lease activities. The required disclosures include:

Nature of leasing activities: A description of the entity’s leasing activities — the types of assets leased, the range of lease terms, and any significant features of the entity’s standard lease arrangements.

Extension and termination options: Information about extension and termination options, including:

• The nature and extent of options embedded in the entity’s leases
• The basis for the “reasonably certain” assessments made
• The potential exposure from options not included in the lease term

Variable lease payments: Where variable lease payments are material — particularly revenue-based or usage-based rent arrangements — the nature and effect of these payments should be explained.

Residual value guarantees: Where the entity has provided residual value guarantees to lessors, the nature and amounts should be described.

Restrictions and covenants: Significant restrictions imposed by leases — such as limitations on additional borrowing, restrictions on subleasing, or asset maintenance obligations — should be disclosed.

Example qualitative disclosure — extension options:

Extension and termination options

The Group's real estate leases typically include extension options exercisable 
by the Group. These options are included in a number of leases to provide 
operational flexibility. The Group assesses at each commencement date whether 
it is reasonably certain to exercise such options.

The Group assesses extension options as reasonably certain where one or more 
of the following factors are present:
— The leased premises are a flagship location for which no comparable 
   alternative is available in the market
— The Group has made significant leasehold improvements that would be 
   economically impractical to abandon
— Relocation costs would be material relative to the remaining lease 
   payments under the extension option

At the reporting date, the Group has assessed extension options with a 
total undiscounted value of ¥x,xxx million as reasonably certain and has 
included these in the lease term. Extension options with a total potential 
value of ¥x,xxx million have not been included in the lease term as they 
have not been assessed as reasonably certain.

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Lessor Disclosures

Finance Lease Disclosures

IFRS 16.94 requires a finance lessor to disclose:

• A maturity analysis of lease payments receivable — showing the undiscounted lease payments and reconciling to the net investment in the lease
• The unearned finance income deducted from the gross investment to arrive at the net investment
• The unguaranteed residual value accruing to the lessor
• A description of the lessor’s risk management approach relating to residual values

Maturity analysis — finance lessor:

Net investment in finance leases (maturity analysis)

                                      Current year
                                      ¥m
Within 1 year                         x,xxx
Between 1 and 5 years                 x,xxx
More than 5 years                     x,xxx
Gross investment in leases            x,xxx
Less: unearned finance income         (x,xxx)
Net investment in leases              x,xxx

For manufacturer and dealer lessors, IFRS 16.96 requires separate disclosure of:

• Selling profit or loss recognised at the commencement date
• Finance income on the net investment, presented separately from other finance income
• Income relating to variable lease payments not included in the net investment

Operating Lease Disclosures

IFRS 16.97 requires an operating lessor to disclose:

• Operating lease income for the period, with variable lease income shown separately
• A maturity analysis of undiscounted future lease payments under non-cancellable operating leases
• Information about the carrying amount of the underlying assets subject to operating leases

Maturity analysis — operating lessor:

Future minimum lease payments receivable under non-cancellable 
operating leases

                                      Current year
                                      ¥m
Within 1 year                         x,xxx
Between 1 and 2 years                 x,xxx
Between 2 and 3 years                 x,xxx
Between 3 and 4 years                 x,xxx
Between 4 and 5 years                 x,xxx
More than 5 years                     x,xxx
Total                                 x,xxx

Sublease Disclosures

An intermediate lessor discloses:

• Finance income from subleases classified as finance leases
• Operating income from subleases classified as operating leases
• The maturity analysis of the sublease — as a finance lessor (net investment maturity analysis) or operating lessor (future payments maturity analysis), depending on the sublease classification

Where the sublease is classified as a finance lease, the intermediate lessor also discloses the carrying amount of the right-of-use asset that has been derecognised as a result of the sublease.

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Disclosure Sufficiency Checklist

Lessee Checklist

Income statement:

• Depreciation by class of right-of-use asset disclosed?
• Interest expense on lease liabilities disclosed?
• Short-term and low-value lease expenses disclosed separately?
• Variable lease payments not in the liability disclosed?

Balance sheet:

• Right-of-use asset roll-forward by class presented?
• Lease liability presented separately or disclosed in the notes?

Cash flows:

• Total cash outflow for leases disclosed?
• Principal and interest components of lease payments identifiable?

Maturity analysis:

• Undiscounted cash flows by time band presented?
• Reconciliation to carrying amount of lease liability provided?

Qualitative:

• Nature and extent of extension and termination options described?
• Basis for “reasonably certain” assessments explained?
• Significant restrictions and covenants from leases disclosed?

Lessor Checklist

Finance leases:

• Maturity analysis of gross investment presented?
• Unearned finance income disclosed?
• For manufacturer/dealer: selling profit and finance income separately disclosed?

Operating leases:

• Lease income for the period disclosed?
• Future minimum lease payments maturity analysis presented?

Subleases:

• Sublease income disclosed by classification?
• Right-of-use assets subject to subleases identified?

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Comparison with Japanese GAAP

Area	IFRS 16	Japanese GAAP
Lessee income statement disclosures	Detailed breakdown required	Simplified disclosure in many cases
Maturity analysis	Undiscounted, with reconciliation to carrying amount	Undiscounted only
Extension option qualitative disclosures	Detailed explanation expected	Limited requirements
Sublease disclosures	Both lessee and lessor perspectives required	Limited guidance

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Summary

The key takeaways from IFRS 16 disclosure requirements are as follows:

• The disclosure objective is to help users understand the effect of leases on financial position, performance, and cash flows — checklist compliance is necessary but not sufficient
• Lessee disclosures span five areas: income statement analysis, right-of-use asset roll-forward, cash flow information, maturity analysis, and qualitative explanation of lease terms and judgements
• The maturity analysis presents undiscounted future lease payments — not the discounted lease liability balance — with a reconciliation bridging the two
• The qualitative disclosure on extension and termination options is one of the most scrutinised areas; it should explain both the basis for the “reasonably certain” assessments made and the potential exposure from options excluded from the lease term
• Lessors disclose a maturity analysis of lease receivables (finance lessors) or future minimum lease payments (operating lessors); manufacturer and dealer lessors separately identify selling profit and finance income
• Intermediate lessors present both lessee and lessor disclosures, with sublease information presented by reference to the right-of-use asset rather than the underlying asset

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