How to Apply IFRS 16 in Sri Lanka – A Step-by-Step Practical Guide

Introduction

IFRS 16 has changed how leases are reported – not just globally, but here in Sri Lanka as well. If you’re a finance manager, accountant, or business owner, you’ve probably heard about the shift from operating lease to right-of-use asset accounting. But applying IFRS 16 in practice, especially in a local context, can still feel overwhelming.

In this blog, we’ll simplify the process of applying IFRS 16 step-by-step, with local examples, journal entries, and useful templates – all tailored for Sri Lankan businesses.

🔍 What Is IFRS 16?

IFRS 16 – Leases replaces the old IAS 17. The key change? Lessees must bring almost all leases on the balance sheet.

No more treating operating leases as simple rent expenses – now they become:

Right-of-use (ROU) assets
Lease liabilities

📌 Who Must Comply in Sri Lanka?

All companies that report under SLFRS, including:

Public listed companies
Large private entities
Audited businesses using IFRS/SLFRS framework

🧾 Step-by-Step Guide to Apply IFRS 16 in Sri Lanka

Step 1: Identify the Lease

Ask: Does your contract convey the right to control an asset for a period of time in exchange for payment?

Local example:

Leasing a shop space in Colombo for 5 years.

Step 2: Gather Lease Terms

Lease period
Fixed and variable payments
Extension or termination options
Discount rate (use borrowing rate if implicit rate is unknown)

Step 3: Calculate Lease Liability

Formula:

javaCopyEditLease Liability = Present Value of Future Lease Payments

Example: Monthly rent LKR 100,000 for 5 years
Discount rate: 6%
Use Excel or a lease calculator (we can help build one at TaxCalculator.lk)

Step 4: Recognize Right-of-Use Asset

ROU Asset = Lease Liability + Direct Costs + Dismantling Costs

Step 5: Record Journal Entries

🎯 On lease commencement:

cssCopyEditDr. Right-of-Use Asset   LKR 5,000,000  
    Cr. Lease Liability       LKR 5,000,000

🎯 Every month:

markdownCopyEditDr. Interest Expense     LKR 25,000  
Dr. Lease Liability      LKR 75,000  
    Cr. Cash/Bank            LKR 100,000

Dr. Depreciation Expense LKR 83,333  
    Cr. Accumulated Depreciation LKR 83,333

🇱🇰 Sri Lanka-Specific Notes

Use LKR-based borrowing rate if available.
SLFRS 16 is locally adopted from IFRS 16 – follow the same principles.
Disclosures must show maturity analysis of lease liabilities in notes to accounts.
KPMG, EY, and CA Sri Lanka regularly publish IFRS 16 guidance – use those as references.

📄 Free Template or Tool

➡️ Need a lease calculator or template in Excel?
Get it free on www.taxcalculator.lk

✅ Conclusion: Make IFRS 16 Simple

Applying IFRS 16 doesn’t have to be confusing. Break it down. Start with one lease. Use real numbers. Automate calculations where you can. And if you need expert support, we’re here to help.

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