IFRS 16 Lease Accounting: A Practical Guide for Saudi Companies in 2026
How to apply IFRS 16 to property, vehicle, and equipment leases: calculating the right-of-use asset, lease liability, discount rate, depreciation, and required disclosures — with a fully worked example.
IFRS 16 fundamentally changed how companies account for leases. The lessee no longer distinguishes between operating and finance leases — virtually all leases (with limited exemptions) appear on the balance sheet as a right-of-use asset and a lease liability. This guide explains the standard in plain language with a fully worked example for a Saudi company.
The five core principles
Right-of-use asset
Recognized on the balance sheet against the lease liability, typically depreciated straight-line over the lease term.
Lease liability
Present value of future payments discounted at the implicit rate or the incremental borrowing rate.
Discount rate
Usually the lessee's incremental borrowing rate — must be documented with objective sources and reviewed regularly.
Lease term
Includes the base period plus any extension options reasonably certain to be exercised.
Disclosures
Detailed note disclosures including future payments, maturity analysis, and short-term lease expense.
Worked example: office lease
A Saudi company signs a 5-year office lease in Riyadh with an annual payment of SAR 120,000 paid in advance and an incremental borrowing rate of 7%. The present value of the five payments in advance = 120,000 × annuity-due factor at 7% ≈ SAR 526,930. This amount is booked as a right-of-use asset against the lease liability. Annually: depreciation ≈ SAR 105,386, with interest that gradually declines and the liability reduced by each payment.
Exemptions: when the standard doesn't apply
The standard allows two practical exemptions: 1) short-term leases (≤ 12 months) with no purchase option, 2) low-value asset leases (e.g. small computers). In both cases the lessee may simply expense the payments straight-line, with no balance-sheet impact.
Full automation in SIDA
SIDA's leases module automatically computes the amortization schedule, interest schedule, periodic journals, and IFRS 16 disclosures. It supports multi-currency contracts, renewal options, and cost centers. All you do is enter the contract once — the rest runs automatically with a full audit trail.