Lease Accounting Under IFRS 16: What Nigerian Businesses Must Know

On 1 January 2019, a new era of lease accounting began. IFRS 16 Leases replaced the old standard IAS 17 and fundamentally changed how lessees account for leases. The change was not merely cosmetic—it represented one of the most significant shifts in financial reporting in decades. Under IAS 17, over 85% of leases were classified as operating leases and remained off the balance sheet, representing approximately $2.8 trillion in hidden liabilities worldwide .

IFRS 16 eliminated this off-balance-sheet treatment for lessees. Most rental arrangements now fall under the definition of a lease, requiring recognition of a Right-of-Use (ROU) asset and a lease liability . For Nigerian businesses, this change brought significant implications—not just for financial reporting, but also for tax compliance, financial ratios, and business decision-making.

This comprehensive guide examines the key requirements of IFRS 16, the practical implications for Nigerian businesses, the tax treatment of leases under Nigerian law, and the compliance challenges that organisations face in implementing the standard.

The Pain Points: Why IFRS 16 Matters for Nigerian Businesses

The Hidden Liability Problem

Before IFRS 16, many businesses classified their leases as operating leases, keeping substantial lease obligations off their balance sheets. This practice obscured the true extent of a company’s financial commitments and made it difficult for investors and creditors to assess the company’s financial position accurately. IFRS 16 addresses this by bringing most leases onto the balance sheet, providing greater transparency .

The Three-Way Mismatch

One of the most significant pain points for Nigerian businesses is the mismatch between IFRS 16 accounting treatment and tax treatment. Under IFRS 16, the traditional “Rent Expense” disappears from the income statement, replaced by depreciation of the Right-of-Use asset and interest expense on the lease liability .

However, tax authorities in Nigeria do not recognise IFRS 16 depreciation or interest for tax purposes. Under the Nigeria Tax Act 2025, which took effect in January 2026, capital allowances only apply to owned assets or specific finance leases. For standard operating leases capitalised under IFRS 16, businesses must meticulously add back the depreciation and interest in their tax computations to avoid underpayment penalties .

The WHT Trap

Even though a lease is accounted for as a “finance-like” asset in the books, businesses must still apply Withholding Tax (WHT) on the gross cash rent payments. Failure to match WHT filings with physical rent payments can trigger immediate audits .

The Discount Rate Conundrum

Determining the appropriate discount rate for lease liabilities presents a significant challenge. When the implicit rate in the lease is not available, businesses must use the lessee’s incremental borrowing rate (IBR). The IBR is “the rate the lessee would have to pay to borrow funds to obtain a similar asset in a similar term and economic environment” .

For Nigerian businesses with USD-denominated leases, a common mistake is using a U.S. Treasury Bill rate instead of a rate that reflects the Nigerian economic environment. Using the U.S. T-bill rate (around 4.3%) assumes zero inflation risk, zero foreign exchange volatility, and a U.S.-level credit rating—none of which reflect the Nigerian environment. The IFRS 16-compliant approach is to start with a USD risk-free rate such as SOFR or U.S. Treasury yield and add a credit spread that reflects the entity’s borrowing risk and Nigeria’s country risk for USD borrowings, often in the +6% to +10% range .

What Changed Under IFRS 16?

The Old Rule Under IAS 17

Under IAS 17, a lease arrangement was classified as either an operating lease or a finance lease. Finance leases were arrangements that transferred the risks and rewards relating to the use of an asset from the lessor to the lessee. All other lease arrangements were classified as operating leases .

Accounting by Lessee under IAS 17:

• Finance lease: Lessees recognised a finance lease as both an asset and a liability at an amount equal to the fair value of the leased asset or the present value of the minimum lease payments. The lessee depreciated the leased assets annually and charged the annual finance (interest) cost to the income statement .

• Operating lease: Lessees were not allowed to recognise any asset. Operating lease payments were recognised as a periodic expense on a straight-line basis over the term of the lease .

The New Rule Under IFRS 16

The major impact of IFRS 16 is on the recognition, measurement, and disclosure requirements for lessees. The new standard eliminates the classification of leases as either operating or finance for lessees and, instead, introduces a single lessee accounting model .

Accounting by Lessee under IFRS 16:

• Right-of-Use Asset: A lessee recognises a right-of-use asset, representing the lessee’s right to use the underlying asset for the lease term .

• Lease Liability: A lessee recognises a lease liability, representing the lessee’s obligation to make lease payments .

• Depreciation: The ROU asset is depreciated over the lease term, generally on a straight-line basis .

• Interest Expense: Interest on the lease liability is recognised to maintain a constant rate on the outstanding lease liability .

The Impact on Financial Statements

The transition to IFRS 16 has moved billions in “hidden” liabilities onto balance sheets globally . The key changes to financial statements include:

The Nigerian Practice Context

Prepaid Rent Treatment Under IFRS 16

In Nigeria, commercial rent is typically paid fully in advance for the entire lease period. This creates a unique situation under IFRS 16: lease liabilities may not arise because there are no unpaid future lease payments. In such cases, the ROU asset is measured based primarily on the cash paid upfront plus any directly attributable costs .

Practical Illustration:

Owonikoko Nigeria Ltd entered into a 3-year lease on 15 January 2026 for an office space. Rent is ₦5 million per year, payable upfront. Owonikoko pays:

Lease payment (3 years): ₦15,000,000

Agency/Solicitor fee: ₦500,000

Accounting Treatment:
The ROU asset is initially measured at cost, which comprises:

Present value of lease payments (if unpaid)

Plus: Advance lease payments / initial deposits

Plus: Direct costs (e.g., agency/solicitor fees)

Plus: Estimated cost of dismantling/restoration (if applicable)

Since the entire lease payment is made upfront, the ROU asset is measured at ₦15,500,000 (₦15,000,000 + ₦500,000). The ROU asset is then depreciated over the lease term on a straight-line basis .

Right-of-Use Asset Measurement

The ROU asset is initially measured at cost, which comprises:

The present value of lease payments (if unpaid)

Advance lease payments / initial deposits

Direct costs (e.g., agency/solicitor fees)

Estimated cost of dismantling/restoration (if applicable) 

Subsequently, the ROU asset is measured at:

Cost less accumulated depreciation

Less accumulated impairment 

Tax Implications of Leases in Nigeria

The Old Tax Treatment Under IAS 17

Under the old rule, Nigerian tax law aligned with the accounting treatment under IAS 17 .

Finance Lease Tax Treatment:

• Lessee: The lessee deducts withholding tax on the annual finance/interest charge and claims capital allowance on the leased asset. The interest charge constitutes a deductible expense when computing income tax liability .

• Lessor: The finance income constitutes a taxable income, and the lessor is not allowed to claim capital allowance on the leased assets .

Operating Lease Tax Treatment:

• Lessee: The lessee deducts withholding tax on the annual operating lease rental .

• Lessor: The lessor accounts for VAT on the rental income .

The Tax-Reporting Mismatch Under IFRS 16

Under IFRS 16, the traditional “Rent Expense” disappears from the income statement, replaced by depreciation of the ROU asset and interest expense on the lease liability .

However, the Nigeria Tax Act 2025 (effective January 2026) emphasises that capital allowances only apply to owned assets or specific finance leases. For standard operating leases capitalised under IFRS 16, businesses must meticulously add back the depreciation and interest in their tax computations to avoid underpayment penalties .

Key Considerations for Nigerian Businesses

Withholding Tax (WHT): Even if a lease is accounted for as a “finance-like” asset in the books, businesses must still apply Withholding Tax on the gross cash rent payments. Failure to match WHT filings with physical rent payments can trigger immediate audits .

Capital Allowances: Under the NTA 2025, capital allowances only apply to owned assets or specific finance leases. For operating leases capitalised under IFRS 16, no capital allowances are available .

Deductible Expenses: For tax purposes, only the actual lease rent incurred/paid during the period is deductible. IFRS 16 depreciation and interest are not deductible for tax purposes .

Impact on Financial Performance

Research on Nigerian consumer goods companies found that lease finance showed a negative but significant effect on Return on Assets (ROA). The study recommended that companies focus on improving their lease management practices to ensure efficient utilisation of leased assets, including implementing robust tracking systems, optimising lease terms, and renegotiating lease agreements where necessary to better align with business objectives .

Discount Rate Determination for Nigerian Leases

The Incremental Borrowing Rate (IBR)

When the implicit rate in the lease is not available, IFRS 16 requires the use of the lessee’s incremental borrowing rate (IBR). The IBR is “the rate the lessee would have to pay to borrow funds to obtain a similar asset in a similar term and economic environment” .

Common Mistake: Using US Rates for Nigerian Leases

A common mistake in Nigerian practice is using a U.S. Treasury Bill rate for USD-denominated leases. This approach is technically incorrect because it assumes:

Zero inflation risk

Zero foreign exchange volatility

U.S.-level credit rating 

None of these assumptions reflects the Nigerian economic environment.

The Correct Approach

The IFRS 16-compliant approach for Nigerian businesses with USD-denominated leases is:

1. Start with a USD risk-free rate—e.g., SOFR or U.S. Treasury yield for the relevant term (say, 6 years ≈ 4.3%)

2. Add a credit spread that reflects the entity’s borrowing risk and Nigeria’s country risk for USD borrowings. This is often in the +6% to +10% range 

This gives a realistic incremental borrowing rate—say ~11% USD, not 4%. Using a 4% rate instead of an 11% rate for a 6-year USD lease could understate the lease liability by 20–30% .

The Principle

The key principle is that even though the lease currency is USD, the economic environment is Nigerian. IFRS 16 requires the rate to reflect where the lessee actually borrows, not where the currency originates .

Sale and Leaseback Transactions

The amendment to IFRS 16, issued in September 2022, provides guidance on measuring lease liability in sale and leaseback transactions. Key implications for Nigerian entities include:

Lease Liability Measurement: Seller-lessees determine the lease liability by considering only the lease payments and not the sale proceeds. This ensures accurate measurement of lease liabilities arising from sale and leaseback transactions .

Variable Lease Payments: The amendment may significantly affect subsequent measurement of lease liabilities with variable lease payments .

Effective Date: The amendment applies to annual reporting periods beginning on or after 1 January 2024, with earlier application permitted .

Forgiveness of Lease Payments

Accounting Treatment

When a lessor legally releases a lessee from its obligation to make specifically identified lease payments:

Lessee: The lessee may recognise the forgiveness as a gain in profit or loss, measured as the amount of lease payments forgiven .

Lessor: The lessor would recognise the forgiveness as a loss in profit or loss, measured as the amount of lease payments forgiven .

Tax Implications

The forgiveness of lease payments may have tax implications for the lessee. The lessee should consult with a tax professional to determine the tax treatment of the forgiveness. The lessor may be able to claim a tax deduction for the loss recognised due to the forgiveness of lease payments .

Regulatory Requirements

The Financial Reporting Council of Nigeria (FRC) regulates financial reporting in Nigeria and may provide guidance on the accounting treatment for lease payment forgiveness. Nigerian companies should :

• Understand the new requirements for measuring lease liabilities and recognise the impact on their financial statements

• Ensure compliance with regulatory requirements and accounting standards when accounting for lease payment forgiveness

• Consider the tax implications of lease payment forgiveness and plan accordingly

• Review contractual agreements to determine the terms and conditions of lease payment forgiveness

Corporate Governance and IFRS 16 Compliance

Research has shown that corporate governance attributes significantly impact compliance with IFRS 16 disclosure requirements. Key findings include:

Board Size: Studies have found a positive and significant relationship between board size and compliance with financial reporting standards .

Audit Committee Independence: An independent audit committee provides objective oversight of the financial reporting process, ensuring that disclosures, including those required under IFRS 16, are accurate and complete. Independence in the audit committee enhances its ability to challenge management and auditors, fostering a culture of transparency and compliance .

Level of Compliance: Research in Bahrain found that the average compliance score with IFRS 16 disclosure requirements was 58.72%, with a maximum of 83% and a minimum of 15%. The level of compliance was positively and significantly associated with company size .

For Nigerian businesses, this highlights the importance of strong corporate governance structures in ensuring accurate and complete IFRS 16 disclosures.

Practical Recommendations for Nigerian Businesses

1. Determine the Appropriate Discount Rate

For leases denominated in foreign currency, ensure the discount rate reflects the Nigerian economic environment. Start with the relevant risk-free rate and add appropriate credit and country risk premiums .

2. Maintain a Lease-to-Tax Reconciliation

Keep a lease-to-tax reconciliation table. Deferred tax calculations must capture the temporary difference between the ROU asset’s carrying amount and the tax base (which is often zero) .

3. Ensure WHT Compliance

Even if a lease is capitalised under IFRS 16, continue to apply Withholding Tax on the gross cash rent payments. Ensure WHT filings match physical rent payments to avoid triggering audits .

4. Review Lease Agreements

Review all lease agreements to identify embedded options (extension, termination, purchase options) and determine the lease term, considering any periods covered by options that are reasonably certain to be exercised .

5. Consider the Impact on Financial Ratios

Understand the impact of IFRS 16 on key financial ratios, including Return on Assets (ROA), Debt-to-Equity ratio, and Asset Turnover ratio. Research shows that lease finance can have a negative but significant effect on ROA and equity ratios .

6. Invest in Systems and Training

Effective IFRS 16 compliance requires robust lease management systems and trained personnel. Consider implementing automated systems for tracking lease terms, calculating lease liabilities, and preparing disclosures.

7. Align Tax and Accounting Treatments

Be aware of the mismatch between IFRS 16 accounting and tax treatment. Add back IFRS 16 depreciation and interest in tax computations to avoid underpayment penalties .

How Qeeva Advisory Helps with IFRS 16 Compliance

We understand that implementing IFRS 16 can be complex for Nigerian businesses. Our team of experienced professionals helps organisations comply with IFRS 16 requirements, manage lease portfolios, and navigate the tax implications of lease accounting.

Our Core Services

Advisory Services Nigeria – Our advisory professionals help you implement IFRS 16-compliant accounting policies, determine appropriate discount rates, and develop robust lease management systems.

Tax Strategies and Planning – We help you understand the tax implications of IFRS 16, optimise capital allowance claims, and ensure compliance with NTA 2025 requirements.

Regulatory Compliance – We ensure your lease accounting meets all regulatory requirements and disclosure obligations under IFRS 16.

Bookkeeping Services – Accurate lease records are essential for compliance. Our bookkeeping services ensure your lease assets and liabilities are accurately recorded and tracked.

Risk Management – We help you identify and manage risks associated with lease accounting, including WHT compliance, tax exposure, and disclosure deficiencies.

Frequently Asked Questions

Q: What is IFRS 16?
A: IFRS 16 is the international accounting standard for leases that replaced IAS 17. It requires lessees to recognise most leases on the balance sheet as right-of-use assets and lease liabilities .

Q: What is a Right-of-Use (ROU) asset?
A: A ROU asset is an asset that represents the lessee’s right to use an underlying asset for the lease term .

Q: What is the incremental borrowing rate (IBR)?
A: The IBR is the rate the lessee would have to pay to borrow funds to obtain a similar asset in a similar term and economic environment .

Q: How are prepaid rents treated under IFRS 16?
A: In Nigeria, commercial rent is typically paid fully in advance. These payments are capitalised as part of the ROU asset and depreciated over the lease term. Lease liabilities may not arise because there are no unpaid future lease payments .

Q: What are the tax implications of IFRS 16 in Nigeria?
A: Under the NTA 2025, capital allowances only apply to owned assets or specific finance leases. For operating leases capitalised under IFRS 16, businesses must add back depreciation and interest in tax computations. Withholding Tax must still be applied on gross cash rent payments .

Q: What is the correct discount rate for USD-denominated leases in Nigeria?
A: The rate should reflect the Nigerian economic environment. Start with a USD risk-free rate such as SOFR and add a credit spread reflecting the entity’s borrowing risk and Nigeria’s country risk (often +6% to +10%) .

Q: When does IFRS 16 apply?
A: IFRS 16 applies to annual reporting periods beginning on or after 1 January 2019. The amendment to IFRS 16 on sale and leaseback transactions applies from 1 January 2024 .

The Bottom Line

IFRS 16 has fundamentally changed how businesses account for leases. For Nigerian businesses, the standard brings significant implications for financial reporting, tax compliance, and business decision-making.

Key Takeaways:

Understand the Single Lessee Accounting Model: Most leases must now be recognised on the balance sheet as right-of-use assets and lease liabilities .

Determine the Correct Discount Rate: For USD-denominated leases, ensure the discount rate reflects the Nigerian economic environment, not just the currency denomination .

Address the Tax-Reporting Mismatch: Under the NTA 2025, add back IFRS 16 depreciation and interest in tax computations and apply WHT on gross cash rent payments .

Manage Lease Portfolios Effectively: Implement robust tracking systems, optimise lease terms, and renegotiate lease agreements where necessary to better align with business objectives .

Maintain Strong Governance: Independent boards and audit committees enhance compliance with IFRS 16 disclosure requirements .

Seek Professional Guidance: IFRS 16 involves complex accounting and tax considerations that require professional expertise to navigate effectively.

Your job is to be prepared. Understand the requirements of IFRS 16. Implement robust lease management systems. Ensure tax compliance. Seek professional guidance.

With the right approach and the right partner, you can turn IFRS 16 compliance from a reporting burden into a strategic advantage for transparent and accurate financial reporting.

Suggested Reading from Our Blog

Tangible Non-Current Assets: IAS 16, IAS 20, IAS 23, IAS 40, IFRS 5 & IFRS 16 Guide – Comprehensive guide to accounting for tangible non-current assets under IFRS.

IFRS vs. Nigerian GAAP: Key Differences Every Business Should Know – Understand the critical differences between IFRS and Nigerian GAAP.

Understanding Depreciation: Methods, Calculations, and Financial Statement Impact – Explore the various depreciation methods allowed under IAS 16 with practical examples.

Investment Property vs. Owner-Occupied Property: Key Distinctions Under IAS 40 – Learn how to distinguish between investment property and owner-occupied property for proper classification.

Reference Links / Sources

IFRS Foundation – IFRS 16 Leases – Official text of IFRS 16 including recognition, measurement, and disclosure requirements

LinkedIn – IFRS 16: Right-of-Use Asset vs Prepaid Rent – Practical illustration of ROU asset measurement for Nigerian leases with upfront payments

LinkedIn – IFRS 16 mistake: Using US rate for Nigerian lease – Analysis of incremental borrowing rate determination for USD-denominated Nigerian leases

Mondaq – Has The New Lease Rule Come To Change The Tax Space? – Detailed comparison of IAS 17 and IFRS 16, old vs new lease classification, and Nigerian tax treatment

FUDMA Journal – Effect of Lease Financing on Financial Performance – Research showing negative but significant effect of lease finance on ROA of Nigerian consumer goods companies

LinkedIn – IFRS 16: The Three-Way Mismatch Between Balance Sheets and Taxes – Analysis of IFRS 16 vs tax treatment in Nigeria, WHT implications, and NTA 2025 requirements

ICAN Study Text – Lease Term and Useful Life Guidance – Guidance on lease term determination and sale and leaseback amendments

ICAN Study Text – Lease Payment Forgiveness – Accounting and tax treatment of lease payment forgiveness under IFRS 16

ANUK Journal – Board Attributes and IFRS 16 Compliance – Research on corporate governance factors affecting IFRS 16 compliance

UMYU Journal – IFRS 16 and Financial Performance of Nigerian Banks – Research on impact of IAS 17 and IFRS 16 on financial performance of Nigerian banks

Let’s Talk About Your IFRS 16 Compliance Needs

Implementing and maintaining IFRS 16 compliance can be complex. At Qeeva Advisory, we understand the challenges faced by Nigerian businesses in correctly applying IFRS 16, determining appropriate discount rates, and navigating the tax implications of lease accounting.

Whether you need help with lease classification, ROU asset measurement, or tax compliance, we are here to support you.

📞 Call us: (+234) 802 320 0801, (+234) 807 576 5799

📧 Email: info@qeeva.com

📍 Visit us: 5, Ishola Bello Close, Off Iyalla Street, Alausa, Ikeja, Lagos, Nigeria

Contact us today to schedule a consultation. Let us help you navigate IFRS 16 compliance with confidence.

Your journey to IFRS 16 compliance starts with a conversation. Let’s talk.