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Sub-leasing - should your accounting change for IFRS 16?

15 May 2018

It is often said that IFRS 16 will not have any significant impact for lessors as the accounting requirements are unchanged. This is actually an oversimplification as there are a number of reasons why lessors may need to change their accounting on adopting IFRS 16.

One such area where the requirements have changed relates to sub-leasing. Like IAS 17, IFRS 16 requires a lessor to classify leases as either operating or finance based on the extent to which the lease transfers the risks and rewards incidental to ownership of an underlying asset. Similarly, IFRS 16 provides the same list of situations that, individually or in combination, would normally lead to a lease being classified as a finance lease. For example, whether the lease transfers ownership of the underlying asset to the lessee at the end of the lease term, or whether present value of the lease payments amounts to substantially all of the fair value of the underlying asset.

IFRS 16 contains an additional paragraph (B58) within the Application Guidance which requires an intermediate lessor to classify a sublease as a finance or operating lease as follows:

  1. If the head lease is accounted for as a short term lease, the sublease is classified as an operating lease
  2. Otherwise, the sublease is classified by reference to the right-of-use asset arising from the head lease, rather than by reference to the underlying asset. This is best illustrated by an example:


An intermediate lessor enters into a five-year lease for 5,000 square metres of office space (the head lease) with Entity A (the head lessor).

At the beginning of year three, the intermediate lessor sublets the 5,000 square metres of office space for the remaining three years of the head lease to a third party.


From the intermediate lessor’s perspective, at the time the sub-lease is entered into, the right-of-use asset has a remaining economic life of three years, and it is being sub-leased for the entirety of that period. As the sub-lease is for all of the remaining useful economic life of the right-of-use asset, the sub-lease is classified as a finance lease, even though three years is unlikely to be the full remaining useful economic life of the underlying property.

This means sub-leases may more commonly result in right-of-use assets being classified as finance leases from the perspective of the intermediate lessor. In the above example, the underlying asset is real estate, which would typically be classified as an operating lease by the lessor since most real estate leases do not transfer substantially all of the risks and rewards of ownership.

However, because the asset held by the intermediate lessor is a right-of-use asset with a much shorter useful economic life, the classification of the sub-lease by the intermediate lessor may differ from that of the head lessor.

This change in treatment could, amongst others, affect investment properties which are held under a lease and retailers letting out surplus space.

For help and advice on accounting for leases please get in touch with your usual BDO contact or Mark Edwards.

Read more on accounting for leases:

IFRS 16: Presentation and disclosures for lessees under IFRS16

IFRS 16: A closer look at discount rates

IFRS 16: Taking a closer look at sale and leaseback transactions

IFRS 16: A closer look at practical expedients available on transition for lessees

IFRS 16: Transition for lessees

IFRS 16: Lessee accounting - recognition of the right-of-use asset

IFRS 16: Initial recognition of the lease liability by lessees

IFRS 16: a closer look at short-term leases

IFRS 16 - a closer look at separating lease components

IFRS 16 - Definition of a lease

IFRS 16 – a closer look at ‘low value’


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