IFRS 16 fundamentally changed how South African companies account for leases. Since replacing IAS 17 in 2019, the standard requires almost every lease to appear on the balance sheet — creating right-of-use (ROU) assets and lease liabilities that must be tracked, remeasured, and disclosed throughout the life of the contract.
For listed companies on the JSE, compliance is therefore mandatory. However, many finance teams still manage IFRS 16 obligations in Excel — an approach that introduces material risk as lease portfolios grow in size and complexity.
This guide, therefore, covers the key requirements of IFRS 16 from a South African perspective: who the standard applies to, how the accounting model works, where companies typically run into difficulty, and what a more reliable approach looks like in practice. A worked numerical example is included to illustrate how the calculations flow.
What Is IFRS 16 and Who Does It Apply To in South Africa?
IFRS 16 Leases is the International Financial Reporting Standard that requires lessees to recognise a right-of-use asset and a corresponding lease liability for almost all lease arrangements. It replaced IAS 17 and took effect for annual reporting periods beginning on or after 1 January 2019.
In South Africa, IFRS 16 is mandatory for the following entities:
- All companies listed on the Johannesburg Stock Exchange (JSE)
- Public Interest Entities (PIEs) and companies required to apply full IFRS
- In addition, any entity that voluntarily applies IFRS as its financial reporting framework
However, smaller companies that apply IFRS for SMEs are not subject to IFRS 16. That framework retains an approach closer to the old IAS 17 model. Any entity preparing consolidated financial statements under full IFRS, however, must apply it.
Two practical expedients allow companies to keep certain leases off the balance sheet:
- Short-term leases — leases with a term of 12 months or less at commencement
- Low-value assets — leases of assets with an underlying value of approximately USD 5,000 or less when new (as the IASB indicates in the Basis for Conclusions to IFRS 16)
When these expedients apply, companies recognise lease payments as an expense on a straight-line basis instead of using the full balance sheet model.
The Core Accounting Model: How IFRS 16 Works in Practice
Under IFRS 16, the lessee recognises almost all leases on the balance sheet at commencement. As a result, companies report higher assets and liabilities. Moreover, the standard eliminates the old distinction between operating and finance leases for lessees — both are now treated consistently.
Step 1: Initial Recognition at Commencement
At the lease commencement date, the lessee recognises:
- A right-of-use (ROU) asset — which represents the right to use the underlying asset over the lease term
- A lease liability — representing the obligation to make future lease payments
The lessee measures the lease liability at the present value of future lease payments and discounts them using the interest rate implicit in the lease — or, where that rate cannot be readily determined, uses the incremental borrowing rate. In practice, therefore, most South African businesses use the incremental borrowing rate.
The lessee initially measures the ROU asset at the same amount as the lease liability and adjusts it for:
- Any lease payments made at or before commencement
- Initial direct costs
- Restoration costs (where the company has recognised a provision)
Step 2: Subsequent Measurement
However, after initial recognition, each reporting period requires two separate calculations:
- Lease liability — the liability increases by the interest charge (unwinding of the discount) and decreases by lease payments made. This produces an amortisation schedule similar to a loan.
- ROU asset — the asset is depreciated over the shorter of the lease term and the useful life of the underlying asset. Where the entity expects ownership transfer, it depreciates the asset over its useful life.
As a result, each lease generates both depreciation on the ROU asset and finance costs on the lease liability. Notably, this double P&L impact did not exist under the old operating lease treatment — and it often surprises finance teams encountering IFRS 16 for the first time.
Step 3: Lease Modifications and Remeasurement
In addition, the lessee must remeasure the lease liability when any of the following changes occur:
- The lease term — for example, when an extension option is reassessed
- The amounts expected to be payable under residual value guarantees
- Future lease payments resulting from a change in index or rate (such as CPI escalations)
- The assessment of a purchase option
In practice, however, CPI-linked escalation clauses are common in South African property leases. Each time payments change, the lease liability and ROU asset must be recalculated — using a revised discount rate in some circumstances.
Worked Example: IFRS 16 Lease Calculation for a South African Business
To illustrate this, the following example shows how IFRS 16 accounting works for a typical South African office lease.
Lease Terms
- Asset: Office premises in Johannesburg
- Annual lease payment: ZAR 120,000 (paid at the end of each year)
- Lease term: 5 years (no extension option exercised)
- Incremental borrowing rate: 11.25% per annum
- Commencement date: 1 January 2024
Step 1: Calculate the Lease Liability at Commencement
In this case, the lease liability equals the present value of the five annual payments, discounted at 11.25%:
PV = 120,000 ÷ (1.1125)¹ + 120,000 ÷ (1.1125)² + 120,000 ÷ (1.1125)³ + 120,000 ÷ (1.1125)⁴ + 120,000 ÷ (1.1125)⁵
PV = 107,865 + 96,952 + 87,148 + 78,334 + 70,410
Lease liability at commencement = ZAR 440,709
The entity therefore recognises the ROU asset at the same amount: ZAR 440,709 (assuming no initial direct costs or prepayments).
Step 2: Lease Liability Amortisation Schedule
As a result, the table below shows how the lease liability unwinds over the five-year term:
Year | Opening liability (ZAR) | Interest @ 11.25% (ZAR) | Payment (ZAR) | Closing liability (ZAR) |
2024 | 440,709 | 49,580 | 120,000 | 370,289 |
2025 | 370,289 | 41,657 | 120,000 | 291,947 |
2026 | 291,947 | 32,844 | 120,000 | 204,791 |
2027 | 204,791 | 23,039 | 120,000 | 107,830 |
2028 | 107,830 | 12,131* | 120,000 | — |
* Rounded to balance. Total interest over 5 years: ZAR 159,251.
Step 3: Income Statement Impact — Year 1 (2024)
In the first year, therefore, the income statement carries two separate charges:
- Depreciation on ROU asset: ZAR 440,709 ÷ 5 years = ZAR 88,142
- Finance costs (interest on lease liability): ZAR 49,580
Total P&L charge in Year 1: ZAR 137,722 — compared to ZAR 120,000 under the old straight-line operating lease treatment. The difference reflects the front-loading effect of IFRS 16.
IFRS 16 Challenges Specific to South African Businesses
While IFRS 16 is an international standard, several factors make compliance particularly demanding for South African entities.
CPI-Linked Lease Escalations
Specifically, annual CPI-linked escalation clauses are standard in South African commercial property leases. Under IFRS 16, these variable payments — once linked to an index — must be included in the initial lease liability measurement using the current index at commencement.
Moreover, each time the payments change, the lease liability and ROU asset must be remeasured. For this reason, a company managing 20 or 30 property leases with different anniversary dates will find that tracking and calculating these remeasurements manually is error-prone and time-consuming.
Determining the Incremental Borrowing Rate
In most cases, South African companies cannot determine the interest rate implicit in their leases. Instead, they apply the incremental borrowing rate — the rate at which the entity could borrow, for a similar term and with similar security, in the same economic environment.
South Africa’s interest rate environment is elevated relative to many IFRS-reporting jurisdictions. As a result, the choice of incremental borrowing rate has a material effect on the present value calculation — and auditors scrutinise this assumption closely.
Foreign Currency Leases
Beyond property leases, entities with leases denominated in foreign currencies — USD or EUR, for example — face additional complexity. The company translates the lease liability at the spot rate at each reporting date. Consequently, the company recognises exchange differences in profit or loss.
For groups with multi-jurisdictional operations, this adds another layer of remeasurement work at each period end.
Why Spreadsheets Struggle with IFRS 16 at Scale
Many South African companies initially implemented IFRS 16 using Excel. For a small number of leases, this works well enough. However, this changes as complexity increases. However, as the portfolio grows — or as individual leases become more complex — the limitations become significant.
Common Spreadsheet Failures Under IFRS 16
Common problems with spreadsheet-based IFRS 16 models include:
- Remeasurement events are missed — CPI escalations require a new calculation at each lease anniversary, and it is easy to lose track across a large portfolio
- Discount rate assumptions are inconsistently applied or inadequately documented across the portfolio
- Lease modifications — renewals, terminations, changes in scope — require manual rebuilding of individual schedules
- There is no audit trail: spreadsheets do not record who changed a number or when
- Year-end reconciliations between the lease liability and the general ledger are slow and error-prone
- Producing the maturity analysis required for financial statement disclosures demands significant manual aggregation
The Cost of Getting It Wrong
Importantly, these are not edge cases. In fact, they are the routine realities of managing a lease portfolio in Excel — and they consume finance team time that is better spent elsewhere. A single missed CPI remeasurement or an incorrectly applied discount rate across multiple leases can result in a materially misstated lease liability — something auditors will identify.
IFRS 16 for South African Accounting Firms
However, accounting firms face a different challenge. Rather than managing one company’s lease portfolio, they may be responsible for IFRS 16 compliance across dozens of clients — each with different lease types, commencement dates, escalation terms, and reporting periods.
In practice, preparing IFRS 16 schedules for clients in separate Excel workbooks is common but not scalable. The risks include:
- Inconsistent methodology applied across different clients or different staff members
- Version control issues when schedules are updated mid-year
- Difficulty demonstrating a clear audit trail during the external audit process
- Significant time rebuilding schedules from scratch when leases are modified or renewed
Firms that move to a dedicated lease accounting platform can apply a consistent methodology across every engagement. Consequently, this reduces preparation time and provides clients with reliable, audit-ready output — without rebuilding a spreadsheet for each change.
IFRS 16 Disclosure Requirements: What South African Companies Must Report
Overall, the disclosure requirements under IFRS 16 are extensive. At a minimum, South African companies must include the following in their financial statements:
- Depreciation charge for right-of-use assets, by class of underlying asset
- Interest expense on lease liabilities
- Total cash outflow for leases in the period
- Additions to right-of-use assets
- Carrying amount of right-of-use assets at period end, by class
- Maturity analysis of lease liabilities — undiscounted cash flows for each of the first five years and a total for the remainder
- Qualitative description of leasing arrangements, including extension options, termination options, and variable lease payments
Therefore, producing these disclosures from a spreadsheet model requires significant manual aggregation. By contrast, a dedicated platform generates the required outputs directly from the underlying lease data.
Implementing IFRS 16: A Practical Approach for Finance Teams
In practice, whether implementing IFRS 16 for the first time or reviewing an existing approach, the following steps provide a practical framework.
1. Build a Complete Lease Register
First, start with a comprehensive inventory of all lease arrangements — property, vehicles, IT equipment, and any contracts that may contain an embedded lease. Leases are commonly overlooked in service agreements with dedicated equipment, outsourced warehouse arrangements, and multi-year software licences with identified assets.
2. Identify the Lease Term Carefully
The lease term under IFRS 16 includes the non-cancellable period plus any extension options that the entity is reasonably certain to exercise. South African property leases often use a 5+5 year structure — five years non-cancellable with an option to renew. Whether renewal is reasonably certain is a judgement that should be clearly documented and reviewed regularly.
3. Establish Your Incremental Borrowing Rate Policy
Document clearly how the incremental borrowing rate is determined. Many South African companies use their existing bank lending rate as a starting point, then adjust for the term and security position of each lease. Above all, applying this consistently across the portfolio is important for audit purposes.
4. Set Up a Remeasurement Calendar
CPI escalations, option reassessments, and lease modifications are all remeasurement triggers. Track the anniversary dates and trigger events for each lease. Build remeasurement into the period-end close process — not just the year-end audit. A missed remeasurement can result in a materially misstated lease liability.
5. Reconcile to the General Ledger Regularly
Lease liability and ROU asset balances must reconcile to the general ledger at each reporting date. Therefore, build this reconciliation into the standard close process rather than treating it as an audit-only exercise.
A Better Approach: Purpose-Built IFRS 16 Software
AssetAccountant is a cloud-based platform built for fixed asset depreciation and IFRS 16 lease accounting. Specifically, it is designed to help finance teams and accounting firms replace spreadsheet-based lease schedules with a system that automates calculations, tracks remeasurement events, and produces audit-ready output.
Key capabilities relevant to IFRS 16 compliance include:
- Automated lease liability amortisation schedules — calculated from your inputs, using the incremental borrowing rate you specify
- Right-of-use asset depreciation — calculated alongside the lease liability with full visibility of each component
- Remeasurement handling — the platform recalculates the lease liability and ROU asset when modification events occur, maintaining a complete history of changes
- Journal entry output — structured to post directly to your general ledger or connected accounting platform
- Integration with Xero, QuickBooks Online, Sage Intacct, and Microsoft Dynamics 365 — reducing manual data transfer between systems
- Scalable across large and complex lease portfolios — suitable for multi-entity groups and accounting firms managing multiple clients
- Audit-ready reporting — full schedules and disclosure outputs, including the maturity analysis required under IFRS 16
Moreover, for accounting firms, the platform supports a consistent methodology across every client engagement — reducing preparation time and improving the reliability of client deliverables.
Conclusion
IFRS 16 is not a one-time implementation exercise. Rather, it is an ongoing accounting obligation — accurate calculations, timely remeasurement, and well-documented audit trails across the life of every lease.
For South African businesses managing property leases with CPI escalations, multi-entity structures, or a large number of leases across different asset classes, spreadsheets introduce unnecessary risk and consume disproportionate finance team time.
Purpose-built lease accounting software addresses these challenges directly. Moreover, it removes the calculation burden from spreadsheets, keeps the lease register current as terms change, and produces the outputs that auditors and reporting teams require — without manual aggregation.
If your team is currently managing IFRS 16 compliance in Excel, then it is worth asking whether the time and risk involved is proportionate — and whether a platform built for the purpose would serve you better.
