IFRS 16 Leases in the UAE: What Goes on Your Balance Sheet

For years, the easiest way to keep a lease off your balance sheet was to call it an “operating lease”. Rent went through the profit and loss account as a single line, and the future commitment sat quietly in the notes. IFRS 16 ended that. Since 2019, a lessee reporting under full International Financial Reporting Standards has to recognise almost every lease as an asset and a liability — and for UAE companies, that accounting now flows directly into a corporate tax return.

This guide explains what IFRS 16 leases accounting looks like in practice for a UAE business: what changed, which leases are exempt, whether it even applies to your company, and how it interacts with the corporate tax you file with the Federal Tax Authority. The short version is that IFRS 16 rarely changes how much tax you pay overall — but it can change when you pay it, and that is worth understanding before your auditor raises it.

What IFRS 16 actually changed

Under the old standard, IAS 17, a lessee split leases into two types. A finance lease — essentially a purchase funded over time — went on the balance sheet. An operating lease — a straightforward rental — did not; you simply expensed the rent. The line between the two was a matter of judgement, and it meant two companies with almost identical commitments could show very different balance sheets.

IFRS 16 removed that distinction for lessees. It introduced a single lessee accounting model: for leases longer than 12 months, the lessee recognises a right-of-use asset (its right to use the item over the term) and a lease liability (the present value of the payments it still owes). The standard has applied to reporting periods beginning on or after 1 January 2019.

The result is that a five-year office lease, a three-year fleet of delivery vans, or a two-year warehouse contract now appears on the balance sheet as both an asset and a debt — where, before, only a note disclosed it. For lenders and investors reading UAE financial statements, that is a much more honest picture of what a business is committed to.

How a lease runs through the accounts

The mechanics follow a consistent path, whatever the asset.

[[chart:ifrs16-lease-flow]]

Two entries do the work. The lease liability starts at the present value of the future payments and is unwound over time: each period you charge interest on the outstanding balance and reduce the liability by the cash you pay. The right-of-use asset starts at that same liability figure (plus any initial costs and prepaid rent) and is depreciated, usually on a straight-line basis over the lease term.

So the single “rent expense” of the old world becomes two expenses: depreciation and interest. Because interest is highest when the liability is largest — at the start — the combined charge is higher in the early years and lower later, even when the cash rent is flat. That front-loading is the single most important feature of IFRS 16 to grasp, and it is where the corporate tax consequence lives.

The paragraph references behind that description are worth having to hand, because they are what an auditor will ask you to evidence.

The two paragraphs that generate the most argument in practice are 26 and 27. The discount rate is a judgement, and it moves the numbers materially; the payment inventory is a completeness problem, because service charges, chiller fees and index-linked escalations sit in different clauses of the same UAE tenancy contract and only some of them belong inside the liability.

A five-year Dubai office lease, worked through in dirhams

Abstract description of front-loading convinces nobody. Take a UAE company on full IFRS signing a five-year office lease at AED 240,000 a year, payable annually in arrears, with no purchase option and no renewal the company is reasonably certain to exercise. It cannot readily determine the rate implicit in the lease, so under paragraph 26 it uses its incremental borrowing rate — assume 6%.

The present value of five annual payments of AED 240,000 at 6% is AED 1,010,967. That is the opening lease liability, and — with no initial direct costs, prepaid rent or restoration obligation in this example — the opening right-of-use asset as well. Depreciated straight-line over the five-year term, the annual depreciation is AED 202,193.

Read the last column and the whole standard makes sense. Over five years the company charges exactly AED 1,200,000 — the cash rent, to the dirham. But the shape has changed: AED 22,851 more expense in year one, AED 24,222 less in year five. At the 9% UAE corporate tax rate, the year-one difference is worth about AED 2,057 of tax deferred, and by year five that deferral has fully reversed. Figures are rounded to the nearest dirham, so the columns cross-cast to within a few dirhams.

That is the entire corporate tax story in one table: a timing difference of a few thousand dirhams on a lease costing over a million. Anyone selling IFRS 16 to a UAE business as a tax planning opportunity is selling the reversal as well as the deferral, and usually not mentioning it.

Which of your contracts is actually a lease

Before any of that arithmetic matters, you have to know which contracts are in scope. Paragraph 9 asks a single question at inception: does the contract convey the right to control the use of an identified asset for a period of time in exchange for consideration? Both halves of that test do real work in a UAE context.

The substitution right in row two is the one that catches UAE logistics arrangements. If the operator has a substantive right to swap you into a different unit and would benefit economically from doing so, there is no identified asset and no lease — but a substitution right written into the contract and never exercised, or one the operator gains nothing from, does not defeat the test. Read the clause, then read what actually happens.

The exemptions that keep most leases simple

IFRS 16 is not as sweeping as it first sounds. The standard deliberately keeps two categories off the balance sheet, and between them they cover a lot of everyday contracts.

The low-value test is applied to the asset when new, not to the total contract, so a large number of small items (a hundred laptops, say) does not lose the exemption. These carve-outs are why a business can adopt IFRS 16 in full and still find that only its property, vehicle and major-equipment leases actually move onto the balance sheet.

How low is low? The standard deliberately declines to say. The Basis for Conclusions to IFRS 16 records at BC100 that when the Board reached its decisions on the exemption in 2015 it had in mind leases of underlying assets with a value, when new, “in the order of magnitude of US$5,000 or less”. That is an illustration of intent, not a bright line written into the standard, and BC100 is explicit that the assessment turns on the nature of the asset too — a lease will not qualify if the asset when new is typically not of low value.

Two further points from the same passage matter for a UAE group applying the exemption consistently. First, the test is not affected by the size of the lessee: an AED 500 million group and a small Sharjah trading company apply the same test to the same tablet. Second, the exemption cannot be used where an asset is highly dependent on or highly interrelated with other assets — so IT equipment assembled from individually cheap components is assessed as the assembly, not component by component.

An election made under paragraph 5(a) applies by class of underlying asset; the low-value election under 5(b) is made lease by lease. Document which election you made, and apply it the same way every period — an inconsistent policy is the easiest audit finding on the whole standard.

Does IFRS 16 even apply to your UAE business?

This is the first question a UAE SME should ask, because the answer is often “no — not the on-balance-sheet part”. The UAE’s corporate tax framework, through Ministerial Decision No. 114 of 2023, sets out which accounting standards a taxable person must use — and it scales by revenue.

• A taxable person must apply full IFRS as the default.
• A taxable person with revenue up to AED 50 million may instead apply IFRS for SMEs — a lighter framework that, crucially, keeps the older operating/finance lease classification. Under IFRS for SMEs, an operating lease is still expensed off balance sheet, exactly as it was under IAS 17.
• A person with revenue up to AED 3 million may use the cash basis of accounting, recognising costs when paid — so a lease is just an expense as the rent leaves the bank.

[[chart:uae-accounting-thresholds]]

In plain terms: a genuine small or medium UAE business, reporting under IFRS for SMEs, does not have to capitalise its office lease under IFRS 16. Full IFRS 16 lease accounting bites for larger companies, for groups that consolidate, and for any business whose bank, investor or auditor requires full IFRS regardless of size. If that is you, the next section matters. If it is not, IFRS 16 is context, not a compliance task — and our guide to the best accounting software for a UAE small business is more useful to you than a lease register.

The corporate tax connection

Here is why an accounting standard belongs on a tax firm’s blog. UAE corporate tax does not start from a separate “tax” set of numbers — under Federal Decree-Law No. 47 of 2022, taxable income is your accounting net profit, prepared under the accepted standards, then adjusted for a defined list of items. Change the accounting for leases and you change the profit the tax return begins with.

Under IFRS 16, that single rent deduction is replaced by depreciation plus interest. Over the whole life of a lease, the total you deduct is broadly the same as the total rent — but the shape is different. The front-loaded interest means larger deductions early and smaller deductions later, so a company on full IFRS 16 typically shows a slightly lower taxable profit in a lease’s opening years and a slightly higher one towards the end, compared with straight-line rent.

The interaction runs deeper for specific assets — for example, the treatment of leased property held at fair value, and the deductibility rules that govern which finance and depreciation costs actually reduce taxable income. Those adjustments are exactly what a corporate tax computation exists to capture. What matters at a strategic level is simpler: whichever standard you use, your leases must be accounted for consistently, and the financial statements you file for corporate tax must reconcile to a defensible lease position.

What changes for lessors

If your business is on the other side — you own assets and lease them out — IFRS 16 changed far less. Lessors still classify each lease as either a finance lease or an operating lease, much as they did before, and account for it accordingly. The heavy lifting of the standard fell on lessees. UAE real estate businesses, equipment hire companies and vehicle-leasing operators should still review their contracts against the standard, but they are not facing the same balance-sheet upheaval that tenants are.

Getting it right: build the lease register

For any UAE company that does fall under full IFRS, the practical foundation is a lease register — a single schedule of every lease that captures, for each one, the asset, the start and end dates, the payment amounts and frequency, any break or renewal options, and the discount rate used. IFRS 16 errors overwhelmingly trace back to a missing or stale register rather than to the arithmetic: a renewed lease never remeasured, a rent review not reflected, or a lease that ended but stayed on the books.

What IFRS 16 makes you disclose

The balance sheet entries are only half the obligation. Paragraph 53 sets out a fixed lessee disclosure package — depreciation by class of underlying asset, interest on lease liabilities, the short-term lease expense, the low-value lease expense, variable payments outside the liability, sublease income, total cash outflow for leases, additions to right-of-use assets, sale-and-leaseback gains or losses, and closing right-of-use carrying amounts by class. Paragraph 54 requires it in tabular format unless another presentation is more appropriate.

For a UAE business, the “total cash outflow for leases” line is the one that draws attention, because it is the number a bank or an investor compares against your rent commitments and your cash flow statement. If your lease register is incomplete, that is where the gap shows. The same register also answers the question a UAE auditor asks first at year end: reconcile the opening lease liability to the closing one, movement by movement.

Lease term, renewals and the UAE tenancy cycle

The largest single judgement in most UAE lease files is the lease term, and the local rental market makes it harder than the textbook suggests. A great many Dubai and Abu Dhabi commercial tenancies run on twelve-month cycles registered through Ejari or its emirate equivalent, renewed year after year for a decade, with a rent review each time. Legally each renewal is a fresh contract; commercially the tenant is never leaving.

IFRS 16 does not let you pick whichever answer you prefer. The lease term is the non-cancellable period, plus optional renewal periods where the lessee is reasonably certain to extend, plus periods covered by a termination option the lessee is reasonably certain not to exercise. Fit-out you paid for, relocation cost, the availability of comparable premises and the history of past renewals all bear on that assessment. A one-year rolling tenancy with an AED 400,000 fit-out inside it rarely has a one-year lease term in substance.

Two mechanical consequences follow. A genuinely twelve-month lease with no renewal certainty qualifies for the short-term exemption and never touches the balance sheet. A twelve-month lease that is in substance a five-year commitment does not — and treating it as short-term is the most common way a UAE tenant understates its lease liability. When circumstances change and the assessment moves, paragraphs 39 to 46 require the liability to be remeasured and the right-of-use asset adjusted, which is why the register has to be reviewed rather than filed.

Good bookkeeping and management accounts make this straightforward, because the register is just another sub-ledger tied to your fixed-asset and finance records. The discipline is the same one that keeps your VAT and corporate tax clean: capture the contract once, keep it current, and let the accounting flow from accurate source data rather than year-end guesswork. If leases make up a large part of your cost base — a retailer with multiple stores, a logistics firm with a vehicle fleet — the register is also a genuine management tool, not just a compliance file.

Where this leaves you

IFRS 16 sounds dramatic, and for large UAE companies on full IFRS it did reshape the balance sheet. But for the typical SME the message is calmer: check which standard you report under, use the AED 50 million and AED 3 million thresholds to place yourself, and only then worry about right-of-use assets. If you are on IFRS for SMEs or the cash basis, your leases stay simple. If you are on full IFRS, the work is a clean lease register and an awareness that the standard front-loads your corporate tax deductions.

One more date belongs on the same calendar for full-IFRS reporters. For annual reporting periods beginning on or after 1 January 2027, IFRS 18 replaces IAS 1, classifying income and expenses into operating, investing and financing categories and making operating profit a required subtotal — so the lease register you build now feeds a profit and loss statement with a different shape.

This is precisely the ground our accounting and bookkeeping and corporate tax teams cover for UAE businesses — deciding the right reporting framework for your size, building the lease register, and making sure the numbers that reach your tax return are consistent and defensible. If leases sit inside a wider question about how your finances are run and reported, our CFO advisory service takes the same discipline up a level. Not sure which standard applies to you? Get a quote and we will map it against your revenue and your lease profile.

Disclaimer: This article is published by Velmont Crest, a DED-licensed UAE accounting firm. We are not a tax agent, an FTA-registered representative, or a licensed financial services firm. The content above is general information about IFRS 16 lease accounting and UAE corporate tax and does not constitute accounting, tax, legal or financial advice. Accounting-standard and tax decisions should be taken with reference to the relevant IFRS Accounting Standards, UAE legislation, Federal Tax Authority guidance and your own qualified advisors.

References

• IFRS Foundation — IFRS 16 Leases
• IFRS Foundation — IFRS 16 Basis for Conclusions, paragraphs BC98–BC104 (leases of low-value assets)
• UAE Ministry of Finance — Ministerial Decision No. 114 of 2023 on the Accounting Standards and Methods for Corporate Tax purposes
• UAE Ministry of Finance — Corporate Tax in the UAE