Background
Adopting IFRS 16 or ASC 842 was a major undertaking for most lessees, and its effects on organizations have been far‑reaching. While investors and analysts generally welcomed the increased transparency—often noting that it formalized information they had previously estimated from disclosures—preparers, particularly smaller entities and not‑for‑profit organizations, have faced significant implementation challenges and ongoing compliance costs (ACAG, 2025; Brown, 2025).
Systems and Process Changes
Bringing leases on balance sheet required companies to gather all lease contracts, often from decentralized records, and extract data such as payment schedules, renewal options, and escalation clauses. Many large companies invested in specialized lease accounting IT systems to manage these calculations, while others attempted to use complex spreadsheets. Cross-functional efforts were needed – accounting teams had to coordinate with procurement, real estate, and legal departments to identify all agreements that contain leases (which can include embedded leases in service contracts). Internal controls had to be updated to ensure completeness and accuracy of the new balances. For smaller entities and nonprofits, the lack of dedicated systems meant a reliance on manual methods and significant use of time and expertise to set up schedules for each lease. Surveys indicate that the majority of companies above a certain size ended up procuring new software or engaging consultants to handle lease accounting, as the complexity was beyond what existing ERP systems or spreadsheets could reliably manage (PwC, 2018; EY, 2019).
Technical Complexity and Judgments
The new standards introduced numerous technical challenges. Lessees had to determine the appropriate discount rate for each lease (often using an incremental borrowing rate estimation), assess lease term (including whether they are “reasonably certain” to exercise extension or termination options), separate non-lease components (like service charges) from lease payments unless an expedient was taken, and handle special cases like leases with variable payments, residual value guarantees, or subleases. These judgments require significant professional analysis. For instance, determining that a company is “reasonably certain” to extend a lease can add years of payments to the liability. Mistakes in these areas can materially misstate the financials. Auditors have reported that auditing IFRS 16/ASC 842 figures is complex, especially verifying that all leases are captured and that assumptions (like economic life of assets, likelihood of option exercises, discount rates) are well-supported (ACAG, 2025). The public sector post-implementation review in Australia noted that many government agencies struggled with determining the lease term for agreements with rolling renewals or vague extension clauses, and with the concept of what constitutes a lease under the new control-based definition (ACAG, 2025). These challenges have gradually been addressed through additional training and guidance, but they contributed to a heavy initial workload and ongoing complexity.
Financial Statement Effects and Business Metrics
The initial adoption of the new standards often caused significant changes in reported figures. For example, companies in lease-intensive industries (airlines, retail, logistics) saw large increases in reported debt and assets. This had the potential to trip debt covenants or alter performance indicators. Many companies had to renegotiate loan covenants with banks to exclude the newly recognized lease liabilities from debt calculations, or to adjust leverage ratio thresholds, so that compliant companies would not technically default purely due to an accounting change. In terms of performance metrics, as discussed in Section 1, IFRS reporters experienced an immediate boost to EBITDA (since expenses that were formerly “rent” moved to depreciation and interest). One analysis found that IFRS 16 adoption led to a median 10%–15% increase in EBITDA for certain sectors (e.g., retail, airlines) in the first year (FTI Consulting, 2019). This required careful communication to investors; many companies provided reconciliations or pro-forma figures to explain that the EBITDA improvement did not signal improved cash flow, but was an artifact of accounting. Similarly, return on capital employed (ROCE) and ROA declined for many companies due to the asset increases. Equity analysts had to update their valuation models, though many were already capitalizing lease commitments from footnotes. Credit rating agencies, which had long estimated lease liabilities, largely welcomed the standardized balance sheet data; for some companies, the recognized lease debt turned out to be even higher than prior estimates, prompting rating methodology adjustments in a few cases. Overall, while the economics of the business didn’t change, the appearance of higher leverage and different earnings profiles sometimes affected perceptions and required explaining.
Impact on Behavior and Decisions
A question raised during the development of the standards was whether capitalizing leases would affect business behavior. There is some anecdotal evidence that companies became more cautious with very long-term leases or sought more flexibility in lease terms to avoid locking in large liabilities. For instance, there were reports of companies negotiating shorter lease terms with more extension options (since a shorter initial term means a smaller liability, unless the extensions are virtually certain). Others considered buying assets outright in cases where the accounting change eliminated the perceived benefit of leasing. However, it’s difficult to isolate the effect of accounting from other factors. Interestingly, the COVID-19 pandemic in 2020 forced many companies to reassess their use of leased office space and real estate, likely having a far greater impact on leasing behavior than the accounting rules did. The IASB’s initial review of IFRS 16 in 2022–2023 found that, for most companies, IFRS 16 did not significantly change the decision to lease vs buy (IASB, 2023a). Business considerations (flexibility, cash flow management, etc.) still dominate, though the accounting might influence how leases are structured (e.g., more interest in service contracts or outsourcing that might avoid lease classification, or ensuring terms are more clearly documented to ease accounting).
Costs and Benefits for SMEs and Nonprofits
Smaller organizations and nonprofits often lack the internal resources (systems and personnel expertise) to implement large accounting changes. For them, IFRS 16/ASC 842 compliance has sometimes been a costly exercise with arguably limited benefit if the primary users of their financial statements (e.g. lenders or donors) already understood their lease obligations. The Australasian Council of Auditors-General noted in 2025 that in the public sector, “ongoing costs of auditing [leases] under [the new standard] are generally higher” and it is unclear if users in that sector have obtained commensurate benefit from the increased precision (ACAG, 2025). Similar sentiments have been expressed by some private SME constituents in various jurisdictions – for example, many private companies in the U.S. pushed for and obtained deferrals in the effective date of ASC 842, and some are still adjusting to the new processes. On the other hand, bank lenders and credit rating agencies often request lease-adjusted figures even from private firms, so there is a growing expectation of transparency regardless of listing status. Some practitioners have noted that the adoption of the new lease accounting standards has produced internal benefits beyond compliance, including the creation of comprehensive lease inventories and improved lease management processes, which may lead to better asset utilization over time (Brown, 2025).
In any case, the standards-setters are monitoring these concerns. The IASB’s Post-implementation Review of IFRS 16, currently underway, is gathering feedback on the costs and complexity for smaller entities and will consider if any amendments or additional reliefs are needed (IASB, 2023a). One possible area of relief could be simplifying disclosures or recognition for smaller leases or entities, but any changes are likely to be incremental.
In conclusion, the adoption of IFRS 16/ASC 842 has achieved its main goal of improving transparency about lease obligations, but not without imposing significant one-time and ongoing costs on preparers. Larger companies largely absorbed these costs by leveraging technology and advisory support. Smaller entities, though sometimes exempt or on delayed schedules, have felt the burden more acutely where they had to implement the changes. The experiences from the first few years (2019–2021) suggest that while the capital markets have benefited from clearer information, standard-setters need to remain mindful of proportionality and perhaps consider further support for SMEs (ACAG, 2025; IASB, 2023a).
Across implementations, patterns are consistent:
Lease data is incomplete or fragmented
Ownership of leases is unclear
Expectations of output are poorly defined
Many customers don’t know what “correct” looks like—making implementation inherently difficult.
Where People Get It Wrong
Common issues:
discount rate confusion
mixing rates with payment variability
expecting deterministic outputs
And one recurring problem:
Even experienced professionals misapply time value of money concepts.
Examples include:
simplistic rate conversions
inconsistent discount methodologies
The hardest part of lease accounting isn’t calculation—it’s governance.