Navigating the Practical and Tax Friction Points of IFRS 16 Leases

Posted 16 July 2026 Written by Acts Online
Category Financial and Accounting

Brought to you by SA Accounting Academy: The implementation of International Financial Reporting Standard 16 (IFRS 16 Leases) continues to present significant practical, administrative, and tax compliance challenges for South African corporate finance teams, particularly regarding asset identification, discount rate determination, and tax reconciliation.

A major structural challenge in the South African corporate landscape is the lack of alignment between full IFRS and the IFRS for SMEs framework. While the International Accounting Standards Board (IASB) finalized the Third Edition of IFRS for SMEs, it deferred the integration of the right-of-use (ROU) asset model found in IFRS 16, opting to wait for a comprehensive post-implementation review. Consequently, two entities with identical leasing arrangements can present vastly different balance sheets and financial ratios depending on which reporting framework they apply.

Core Friction Points in IFRS 16 Execution

Under IFRS 16, finance teams must navigate three primary areas of subjectivity and administrative friction:

  • Asset Identification and Control: A contract contains a lease only if it conveys the right to control the use of an identified asset. If a supplier holds substantive substitution rights—meaning they can practically substitute the asset and benefit economically from doing so—the contract must be accounted for as a service contract under IFRS 15 Revenue from Contracts with Customers rather than a capitalized lease under IFRS 16.
  • Incremental Borrowing Rate (IBR) Determination: If the interest rate implicit in a lease cannot be readily determined, lessees must use their IBR. Calculating a legally and economically defensible IBR requires evaluating the lessee’s credit risk, the lease term, the nature of the collateral, and the macroeconomic environment. Using arbitrary rates risks material misstatement and auditor scrutiny.
  • SARS Tax Misalignment: The South African Revenue Service (SARS) does not recognize the IFRS 16 accounting treatment for tax purposes. Under the Income Tax Act, No. 58 of 1962, tax deductions for leases must align with tax legislation (such as section 11(a) or section 11(f) for lease premiums), requiring complete reversal of IFRS 16 depreciation and interest charges in the tax computation.

Failing to maintain a robust control framework around IFRS 16 calculations exposes organizations to significant audit and tax governance risks. Miscalculated lease liabilities, incorrect discount rates, or failure to properly assess renewal options that are “reasonably certain” to be exercised can lead to material financial restatements. From a tax perspective, failing to accurately reverse IFRS 16 accounting entries in the tax computation will trigger SARS audit flags, underpayment penalties, and interest charges.

To assist professionals in navigating these complexities, Caryn Maitland CA(SA) RA has presented a comprehensive on-demand masterclass covering lessee and lessor accounting, Excel calculation models, and deferred tax computations. You can click here to find out more and register for the on-demand webinar.

What this means for you, your business, or your clients

  • For yourself: You must maintain technical proficiency in both full IFRS and IFRS for SMEs to accurately analyze and compare financial statements across different reporting frameworks, particularly when evaluating lease-related debt ratios.
  • For your business: Your finance department must implement a robust, auditable control framework to calculate and document the Incremental Borrowing Rate (IBR) and verify substantive substitution rights for all corporate leases to avoid audit qualifications.
  • For your clients: You must ensure that clients utilizing full IFRS correctly reverse all IFRS 16 depreciation and interest charges in their tax computations to SARS, replacing them with tax-deductible lease payments under the Income Tax Act, No. 58 of 1962, to prevent penalties and interest.

Originally published at https://accountingacademy.co.za/news/read/beyond-the-balance-sheet-unpacking-the-friction-points-of-ifrs-16-leases

The views expressed herein are those of the author and do not necessarily reflect those of Acts Online. Acts Online accepts no responsibility for the accuracy, completeness or fairness of the article, nor does the information contained herein constitute advice, legal or otherwise.