The introduction of IFRS 16 in 2019 marked a fundamental shift in lease accounting, especially for asset-heavy industries like construction. Suddenly, leases that were once off the books now had to be accounted for right on the balance sheet. For construction companies, this wasn’t just a tweak—it was a total overhaul in how they viewed, reported, and strategized around their leased assets.
But how exactly did the industry respond? Let’s break down what changed, how firms adapted, and what it means going forward.
Understanding the Basics of IFRS 16
The International Financial Reporting Standard 16 (or IFRS 16) redefined how leases are reported on financial statements. Under the previous standard (IAS 17), operating leases—like many construction equipment rentals—were kept off the balance sheet. With IFRS 16, that changed. Now, most leases are recorded as a right-of-use asset and a corresponding lease liability.
For construction companies that rely heavily on rented machinery, vehicles, and temporary structures, this meant a major recalibration of accounting practices.
The Initial Challenges
When IFRS 16 took effect, many construction firms were caught off guard by the scale of the changes. Here’s why:
- Volume of leases: Construction businesses often deal with dozens (or even hundreds) of leases across different projects and geographies.
- Short-term vs long-term: Distinguishing between short-term rentals and longer-term leases became a compliance headache.
- Data gathering: Many lease agreements were stored in silos—some on paper, some in spreadsheets, others in emails—making it difficult to collect consistent data.
- Technology limitations: Some finance teams lacked the tools to process, monitor, and report lease information accurately under the new rules.
Despite the complexity, the construction sector has shown resilience and flexibility—hallmarks of the industry.
How Construction Firms Responded
Here’s how many construction companies approached the transition:
1. Audit of Lease Portfolios
Firms began by conducting full audits of their leases. This meant combing through contracts, supplier agreements, and service deals to determine what qualified under the new standard. This task often required cross-department collaboration between finance, procurement, and legal teams.
2. Technology Implementation
Recognizing the manual approach wasn’t sustainable, many companies adopted lease accounting software designed to track, automate, and ensure compliance. These platforms also integrated with existing ERPs for seamless financial reporting.
3. Staff Training
Finance teams had to be retrained to understand the new requirements and their downstream effects on financial reporting, budgeting, and project bidding. For many, IFRS 16 was more than accounting—it required a cultural shift toward transparency and long-term financial planning.
4. Reevaluating Lease vs Buy Decisions
With leases appearing on balance sheets, some firms began to question whether it made more sense to purchase certain equipment outright. This led to new asset management strategies and financial modeling practices.
5. Consulting External Experts
Many mid-sized firms partnered with accounting consultants during the transition to avoid costly compliance mistakes. External audits and second opinions helped validate that internal processes met international standards.
Real-World Impact on the Industry
This regulatory change wasn’t just about compliance—it also impacted how construction firms planned and managed their projects. With lease liabilities now visible on the books, banks and investors had a clearer picture of a company’s financial health. In some cases, this improved access to capital by showing a more honest view of asset obligations.
But the flip side is that some companies saw their debt ratios balloon overnight—without actually borrowing a cent. That forced leadership to communicate clearly with stakeholders and lenders about the nature of these new “liabilities.”
According to Deloitte’s 2022 Global IFRS Lease Accounting Survey, 79% of companies said that IFRS 16 significantly affected their financial KPIs, including debt-to-equity ratios and EBITDA margins.
Benefits That Emerged
While the initial rollout was tough, many construction firms began to see upside from the new lease accounting rules:
- Greater financial visibility: Leaders had better insight into leasing costs across multiple job sites and projects.
- Improved asset utilization: By centralizing lease data, companies identified underused or redundant assets more easily.
- Tighter procurement controls: Procurement teams could renegotiate lease terms with better data at their fingertips.
- Long-term forecasting: With all lease obligations clearly outlined, firms could plan project budgets and growth strategies more effectively.
What Construction Companies Learned
This wasn’t just about adapting to a rulebook change. For many companies, the move to IFRS 16 was a wake-up call—a push to modernize systems, standardize documentation, and build more strategic finance departments.
Here’s what stuck:
- Investing in digital transformation matters
- Cross-functional collaboration between teams is essential
- Transparency isn’t just for auditors—it builds better businesses
Looking Ahead
Construction companies that successfully adapted to IFRS 16 are now in a stronger position to face future regulatory changes, especially as ESG reporting, supply chain transparency, and real-time financial tracking gain momentum.
For firms still working through the long tail of implementation, the focus now is on optimization. Streamlining lease processes, integrating tech solutions, and reducing manual work are all on the agenda.
Final Thoughts
Construction is an industry built on precision, planning, and progress. Adapting to IFRS 16 tested those qualities—but also sharpened them. Today, firms that took the challenge seriously aren’t just compliant—they’re smarter, more efficient, and better equipped for the evolving business landscape.
