Picture this: You’re sitting at your desk, coffee in hand, staring at a spreadsheet full of lease contracts. IFRS 16 looms ahead like a mountain you need to climb. If you’re in Macedonia, that mountain is right in front of you (31.12.2025!). If you’re in Serbia, you’ve already climbed it, but perhaps you’re helping others navigate the path or dealing with lingering questions.
Either way, you’re in the right place. Let’s make IFRS 16 first-time adoption less intimidating and more manageable.
Why First-Time Adoption Deserves Your Attention
Before IFRS 16, operating leases enjoyed a comfortable life off the balance sheet. Those days are over. Now, almost all leases must be recognized as right-of-use assets and lease liabilities. This shift fundamentally changes how your financial statements look, affects key ratios, and requires careful planning during transition.
The good news? You have choices in how you adopt IFRS 16. The not-so-good news? Each choice comes with its own complexity. Let’s break it down.
Two Roads to IFRS 16: Which Path Should You Take?
Think of IFRS 16 adoption like choosing between two routes to the same destination. One is thorough but demanding (full retrospective), while the other is more practical but comes with some limitations (modified retrospective).
The Full Retrospective Approach: Going All the Way Back
The full retrospective approach means pretending IFRS 16 was always in effect. You’ll restate all comparative periods as if you’d been applying the new standard from day one.
When it makes sense:
- You have relatively few leases with straightforward terms
- You want complete comparability across all reporting periods
- You have strong systems and historical data readily available
- Your stakeholders demand maximum transparency
The reality check: This approach requires significant effort. You’ll need to reconstruct lease accounting from each lease commencement date, calculate right-of-use assets and lease liabilities for all prior periods, and restate your financial statements accordingly. For most companies, this is the road less traveled.
The Modified Retrospective Approach: The Practical Choice
The modified retrospective (or cumulative effect) approach is the one most companies choose. You apply IFRS 16 from the date of initial application without restating comparative periods. Instead, you make a cumulative adjustment to opening equity.
Why companies love it:
- No need to restate prior year’s comparatives
- Less historical data required
- Access to helpful practical expedients
- Faster implementation timeline
The trade-off: Your current year won’t be directly comparable to prior years, which means you’ll need to explain the changes clearly in your financial statements.
Step-by-Step Guide: Modified Retrospective Approach
Let’s walk through the practical steps most companies will follow:
Step 1: Identify All Your Leases at the Transition Date
Create a comprehensive lease inventory. Don’t just look at formal “lease” contracts — IFRS 16 defines leases broadly. That equipment rental agreement? Probably a lease. The long-term warehousing contract? Could be a lease too.
Pro tip: This is the perfect time to organize your lease data in a central repository. Future-you will thank present-you.
Step 2: Calculate Your Lease Liabilities
For each lease previously classified as an operating lease, calculate the present value of remaining lease payments using your incremental borrowing rate at the date of initial application.
The formula: Lease Liability = Present Value of Remaining Payments (discounted at your incremental borrowing rate)
This is where having accurate lease payment schedules is crucial. Variable payments, extension options, and termination clauses all need consideration.
Step 3: Determine Your Right-of-Use Assets
Here’s where you get to make a choice for each lease:
Option 1: Calculate the right-of-use asset as if IFRS 16 had been applied from the commencement date, but discount using your incremental borrowing rate at transition. This requires more work but gives you a more accurate asset value.
Option 2: Set the right-of-use asset equal to the lease liability, adjusted for prepayments or accruals. This is simpler and often preferred.
Journal entry (using Option 2):
DR Right-of-Use Asset / CR Lease Liability
If you’re using Option 1 and there’s a difference between the asset and liability, that difference hits equity:
DR Right-of-Use Asset | DR/CR Retained Earnings (plug) | CR Lease Liability
Step 4: Check for Impairment
Apply IAS 36 to test whether your right-of-use assets are impaired at transition unless you use the practical expedient (more on this below).
Step 5: Disclose, Disclose, Disclose
Prepare robust disclosures explaining the impact of adoption, including a reconciliation between your old IAS 17 operating lease commitments and your new IFRS 16 lease liabilities.
Practical Expedients: Your Best Friends
The modified retrospective approach comes with helpful practical expedients. Use them wisely:
1. Portfolio Approach Group leases with similar characteristics and apply a single discount rate. Perfect for that stack of similar office equipment leases.
2. The Onerous Lease Shortcut Instead of performing impairment testing, use your existing IAS 37 provision for onerous leases to adjust the right-of-use asset. This saves significant time and effort.
3. Short-Term Lease Relief If a lease has less than 12 months remaining at transition, treat it as a short-term lease and expense it straight-line. Why complicate things unnecessarily?
4. Exclude Initial Direct Costs Don’t worry about adding historical initial direct costs to your right-of-use asset. This simplifies your calculations considerably.
5. Use Hindsight When determining lease terms, you can use hindsight to assess extension and termination options. This is especially helpful when circumstances have changed since lease commencement.
Full Retrospective: The Complete Journey
If you’re taking the full retrospective route, you’ll need to:
1. Go back to each lease commencement date Calculate the initial lease liability and right-of-use asset as of that original date.
2. Measure everything consistently Use the interest rate implicit in the lease (if determinable) or your incremental borrowing rate at commencement.
3. Restate all comparative periods Your 2024 comparatives need to reflect IFRS 16, which means recalculating depreciation, interest expense, and removing old straight-line rent expense.
4. Adjust opening retained earnings For the earliest period presented, adjust opening equity for the cumulative effect.
Common Challenges (and How to Survive Them)
Challenge 1: Finding Your Incremental Borrowing Rate
Many companies struggle to determine their incremental borrowing rate, especially if they don’t regularly borrow.
Solution: Consider rates for similar borrowings, adjust for lease-specific factors like security and term, or consult with treasury or external advisors. Document your methodology thoroughly.
Challenge 2: Dealing with Extension and Termination Options
How certain is “reasonably certain”?
Solution: Consider economic incentives, past practice, the asset’s strategic importance, and the costs of not extending. Use the hindsight practical expedient if it helps.
Challenge 3: Variable Lease Payments
Which variable payments get included in the liability?
Solution: Only include variable payments based on an index or rate at transition. Pure usage-based variable payments remain off-balance sheet and are expensed as incurred.
Challenge 4: Data Gaps
Missing lease documents or incomplete payment schedules can derail your transition.
Solution: Start your data gathering early. Engage procurement, legal, and operational teams who may have lease documentation you don’t.
Challenge 5: System Limitations
Your existing systems might not handle IFRS 16 calculations.
Solution: Evaluate whether you need dedicated lease accounting software. For smaller portfolios, well-designed spreadsheets can work, but ensure they’re controlled and auditable.
Context Matters: Serbia vs. Macedonia
For Serbian companies: You adopted IFRS 16 for periods beginning January 1, 2020. By now, you’re likely comfortable with ongoing accounting but might face questions about comparative data or helping subsidiaries in other jurisdictions. Your experience is valuable—document lessons learned and best practices.
For Macedonian companies: With adoption happening for periods starting January 1, 2025, you’re in implementation mode right now. The good news? You can learn from others’ experiences. Focus on:
- Completing your lease inventory by year-end 2024
- Determining transition approach and practical expedients
- Calculating opening balances
- Preparing disclosure notes
Final Thoughts: Making IFRS 16 Work for You
IFRS 16 first-time adoption isn’t just a compliance exercise; it’s an opportunity to improve your lease management processes, enhance visibility over lease commitments, and strengthen financial controls.
Yes, the transition requires effort. Yes, you’ll face challenges. But with precise planning, practical expedients, and a systematic approach, you’ll get there.
Remember: every company that’s adopted IFRS 16 started exactly where you are now. Some chose the scenic full-retrospective route, but most took the modified-retrospective highway and arrived at their destination.
Choose the approach that fits your circumstances, use the practical expedients wisely, communicate clearly with stakeholders, and don’t let perfect be the enemy of good enough.
You’ve got this. Now grab that coffee, open that lease file, and start climbing. The view from IFRS 16 compliance is actually pretty good.
Need help with specific aspects of IFRS 16 adoption? Drop your questions in the comments below, and let’s tackle them together!
This post is also available in: srpski македонски
