IFRS 16 Leases, effective from 1 January 2019, fundamentally changed how businesses account for leases. Under the previous standard (IAS 17), most operating leases were off-balance-sheet — simply charged as rental expense. IFRS 16 brings virtually all leases onto the balance sheet.
The Core Change
For every lease with a term exceeding 12 months and an underlying asset value above a low-value threshold, lessees must recognise:
- A Right-of-Use (ROU) Asset — representing the right to use the leased asset
- A Lease Liability — representing the obligation to make future lease payments
Impact on Financial Ratios
Because both assets and liabilities increase, key ratios change significantly:
- Debt-to-equity ratio increases (higher liabilities)
- EBITDA improves (lease expense replaced by depreciation + interest)
- Return on Assets may initially decline
Common Leases Affected in Kenya
- Office and retail premises
- Motor vehicle leases
- Equipment and plant hire agreements
- IT equipment leases
Our IFRS team helps businesses correctly identify leases under IFRS 16, calculate ROU assets and liabilities, and prepare the required disclosures.
