IFRS 16 and Software Leasing: What changes in accounting

• *The international accounting standard IFRS 16 has fundamentally changed the world of balancing leases. While many leasing contracts could be treated in an out-of-balance sheet manner earlier, IFRS 16 calls for a complete accounting of most leases. This also affects the software leasing. This article explains what IFRS 16 means for companies that lease software and account for international standards. **

The end of the balance sheet neutrality: The right-of-use approach

Short: Executive answer: Understand the impact of IFRS 16 on the accounting of software leasing.

Executive answer: Understand the impact of IFRS 16 on the accounting of software leasing.

For IFRS 16 and Software Leasing: What changes in accounting, Data Analytics & Business Intelligence, Software Financing sowie Software Leasing help you align implementation, scope and budget before you commit.

Prior to the introduction of IFRS 16, lease contracts were divided into operating leases and financing leases.

Operating lease ratios, among which many software lease contracts were included, did not appear in the balance sheet.

The leasing rates were simply recorded as ongoing effort in the profit and loss account. This led to a lower balance sheet and potentially better balance sheet figures.

With IFRS 16, this distinction was largely cancelled for leasing users. The standard follows the Right-of-Use approach.

This means that the leasing user must collect a right of use ("Right-of-Use-Asset") and a corresponding leasing liability in his balance sheet for almost all leasing conditions.

The balance sheet neutrality of leasing is thus history for IFRS users.

Software as an intangible asset: An exception?

Short: One important question is whether IFRS 16 is applied to contracts relating to intangible assets such as software.

One important question is whether IFRS 16 is applied to contracts relating to intangible assets such as software. The scope of IFRS 16 explicitly excludes contracts relating to intangible assets.

Instead, the standard refers to IAS 38 (intangible assets).

However, the boundary is not always easy. A lease agreement can comprise both a software component and a hardware component (e.g. a server).

In such cases, it is necessary to check whether the software component is to be identified as an independent lease component.

If the software is inseparably connected to the hardware, the entire contract may fall under IFRS 16.

The practical impact on the balance sheet

Short: If a software lease agreement falls within the scope of IFRS 16, this has the following consequences for the leasing owner's balance sheet:

If a software lease agreement falls within the scope of IFRS 16, this has the following consequences for the leasing owner's balance sheet:

• Failure extension: By activating the right of use and leasing liabilities, the balance sheet total increases.

• ** Changed expenditure structure:** Instead of linear leasing expenses, depreciation on the right of use and interest expenses from leasing liabilities is now recorded.

  This leads to a higher effort at the beginning of the transit time (degressive progression).

• **Earnings Before Interest, Taxes, Depreciation, and Amortization changes. EBITDA rises, d

References and further reading

Short: The following independent references complement the topics in this article:

The following independent references complement the topics in this article:

• Bitkom – German digital industry association
• German Federal Office for Information Security (BSI)
• European Commission – Digital strategy
• MDN Web Docs (Mozilla)
• W3C – World Wide Web Consortium

"ERP programmes rarely fail on software selection; they fail on unclear process ownership."

— Björn Groenewold, Managing Director, Groenewold IT Solutions

Frequently Asked Questions (FAQ)

What is this article about: “IFRS 16 and Software Leasing: What changes in accounting”?

This post explores IFRS 16 and Software Leasing: What changes in accounting from the perspective of requirements, typical pitfalls, and sensible next steps.

In short: Understand the impact of IFRS 16 on the accounting of software leasing. Learn more about the right-of-use approach and the differences to HGB fixation.

Who benefits most from the content described here?

Useful for project leads and product owners in Contributions who must choose between standard software, custom development, and integration.

How does this topic fit into an IT or digital strategy?

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