IFRS 16 & Commercial Lease Glossary
Definitions of key terms used in commercial lease agreements, IFRS 16 lease accounting, and AI-powered lease abstraction.
Quick Reference
The 10 most important lease accounting terms every finance professional should know — covering IFRS 16, FRS 102, and commercial real estate fundamentals.
A
Amortisation Schedule
A table showing the periodic reduction of the right-of-use asset over the lease term through depreciation charges, alongside the allocation of lease payments between interest expense on the lease liability and reduction of the lease liability principal. This schedule is essential for IFRS 16 compliance and financial reporting.
Related terms: Right-of-Use Asset (ROU Asset), Lease Liability, Depreciation
ASC 842
The US GAAP lease accounting standard issued by FASB, effective from 2019. Like IFRS 16, ASC 842 requires lessees to recognise lease assets and liabilities on the balance sheet, but unlike IFRS 16, it retains the distinction between operating leases and finance leases, resulting in different expense patterns.
Related terms: IFRS 16, FRS 102, Operating Lease
B
Base Rent
The minimum fixed rental amount payable by a tenant under a commercial lease, excluding additional charges such as service charges, insurance, or property taxes. Base rent serves as the foundation for lease liability calculations under IFRS 16 and is often subject to periodic escalation.
Related terms: Rent Escalation, Service Charge, Lease Liability
Break Clause
A provision in a commercial lease that gives either the tenant or the landlord (or both) the right to terminate the lease before the contractual expiry date, typically on a specified date and subject to certain conditions such as advance notice. Break clauses affect the assessment of lease term under IFRS 16.
Related terms: Lease Term, Renewal Option, Notice Period
C
Commencement Date
The date on which a lessor makes an underlying asset available for use by a lessee. This is the date when the lease liability and right-of-use asset are initially recognised on the balance sheet under IFRS 16.
Related terms: Lease Term, Right-of-Use Asset (ROU Asset), Lease Liability
Commercial Lease
A legally binding agreement between a landlord and a business tenant for the rental of property used for commercial purposes such as offices, retail spaces, warehouses, or industrial facilities. Commercial leases typically have longer terms, more complex provisions, and greater financial obligations than residential leases.
Related terms: Lease Term, Lease Abstraction, Base Rent
Confidence Score
In AI-powered lease extraction, a numerical value (typically 0.0–1.0) indicating the system's certainty that an extracted data point is accurate. Higher scores indicate greater confidence. Fields with low confidence scores should be flagged for human review to ensure data quality.
Related terms: Lease Abstraction, Data Extraction, Source Verification
CPI Adjustment
A rent escalation mechanism that links rental increases to changes in the Consumer Price Index (CPI) or a similar inflation measure. CPI-linked rent reviews are particularly common in continental European lease agreements. Under IFRS 16, CPI-linked payments are included in the initial lease liability measurement using the index rate at commencement date.
Related terms: Rent Escalation, Market Rent Review, Indexation
Critical Date
A key date in a commercial lease that requires action or attention, such as break clause exercise dates, renewal option deadlines, rent review dates, or lease expiry dates. Missing a critical date can result in significant financial consequences, such as automatic lease renewal or loss of the right to terminate.
Related terms: Break Clause, Renewal Option, Rent Escalation
D
Dilapidations
The obligation of a commercial tenant to restore the leased property to its original condition at the end of the lease, or to compensate the landlord for any damage or alterations made during the lease term. Under IFRS 16, estimated dilapidation costs (restoration obligations) are included in the initial measurement of the right-of-use asset.
Related terms: Restoration Obligation, Right-of-Use Asset (ROU Asset), End of Lease
Discount Rate
The rate used to calculate the present value of future lease payments for determining the lease liability. Under IFRS 16, lessees should use the interest rate implicit in the lease if readily determinable; otherwise, they must use their incremental borrowing rate.
Related terms: Incremental Borrowing Rate (IBR), Lease Liability, Present Value
E
Embedded Lease
A lease that exists within a contract that is not itself a lease, such as a service agreement or outsourcing contract that includes the use of a specific asset. Under IFRS 16, entities must assess whether a contract contains a lease by determining whether it conveys the right to control the use of an identified asset for a period of time.
Related terms: IFRS 16, Non-Lease Component, Identified Asset
F
Finance Lease
A lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Under both legacy IAS 17 and IFRS 16, finance leases are recognised on the lessee's balance sheet. Under ASC 842, finance leases result in front-loaded expense recognition compared to operating leases.
Related terms: Operating Lease, IFRS 16, Capital Lease
FRS 102
The Financial Reporting Standard applicable in the UK and Republic of Ireland. Section 20 of FRS 102 covers leases and is being updated to align more closely with IFRS 16. The 2026 amendments will require UK entities to bring most leases on-balance-sheet, similar to IFRS 16.
Related terms: IFRS 16, ASC 842, Operating Lease
G
Gross Lease
A commercial lease in which the landlord is responsible for all property operating expenses, including taxes, insurance, and maintenance. The tenant pays a single, all-inclusive rent. This is the opposite of a triple net lease and simplifies expense tracking for the tenant.
Related terms: Triple Net Lease (NNN), Service Charge, Base Rent
H
Head Lease
The original or primary lease agreement between the property owner (freeholder or head landlord) and the first tenant. When a tenant sublets all or part of the property, the head lease remains in force, and the tenant's obligations under it continue regardless of the sublease arrangement.
Related terms: Sublease, Lessor, Lessee
I
IFRS 16
The International Financial Reporting Standard for leases, effective from 1 January 2019. IFRS 16 requires lessees to recognise nearly all leases on the balance sheet as a right-of-use asset and a corresponding lease liability, eliminating the previous distinction between operating and finance leases for lessees.
Related terms: Right-of-Use Asset (ROU Asset), Lease Liability, ASC 842
Incremental Borrowing Rate (IBR)
The rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Under IFRS 16, the IBR is used to discount lease payments when the interest rate implicit in the lease cannot be readily determined.
Related terms: Discount Rate, Lease Liability, IFRS 16
Indexation
The practice of linking rent increases to a published economic index, such as the Consumer Price Index (CPI), Harmonised Index of Consumer Prices (HICP), or a national cost-of-living index. Indexation is the predominant rent escalation mechanism in continental European commercial leases, particularly in France, Germany, and the Netherlands.
Related terms: CPI Adjustment, Rent Escalation, HICP
Initial Direct Costs
Incremental costs that would not have been incurred if the lease had not been obtained, such as commissions or legal fees directly attributable to negotiating and arranging the lease. Under IFRS 16, these costs are added to the initial measurement of the right-of-use asset.
Related terms: Right-of-Use Asset (ROU Asset), IFRS 16
L
Lease Abstract
A structured summary document containing the essential terms and data points extracted from a commercial lease agreement. It typically includes information about the parties involved, lease dates, rent amounts, escalation provisions, renewal and termination options, and any special clauses or conditions.
Related terms: Lease Abstraction, Commercial Lease
Lease Abstraction
The process of extracting and summarising key data points from a commercial lease document into a structured format. A typical lease abstract includes 50–80 fields covering parties, dates, financial terms, renewal options, break clauses, and compliance parameters. AI-powered lease abstraction can complete this process in under 3 minutes compared to 2–4 hours manually.
Related terms: Lease Abstract, Commercial Lease, Data Extraction
Lease Accounting Transition
The process of migrating from a previous lease accounting standard (such as IAS 17 or old FRS 102) to a new standard (such as IFRS 16 or updated FRS 102). Transition involves identifying all existing leases, measuring lease liabilities and right-of-use assets at the transition date, and selecting the appropriate transition approach (full retrospective or modified retrospective).
Related terms: IFRS 16, FRS 102, Modified Retrospective Approach
Lease Incentive
Payments or benefits provided by a lessor to a lessee associated with a lease, such as rent-free periods, contributions to fit-out costs, or cash incentives. Under IFRS 16, lease incentives reduce the initial measurement of the right-of-use asset.
Related terms: Right-of-Use Asset (ROU Asset), Rent-Free Period, Fit-Out Contribution
Lease Liability
The present value of future lease payments that a lessee is obligated to make over the lease term. Under IFRS 16, this is calculated by discounting remaining lease payments using the interest rate implicit in the lease, or if that rate cannot be readily determined, the lessee's incremental borrowing rate.
Related terms: Right-of-Use Asset (ROU Asset), Incremental Borrowing Rate, Discount Rate
Lease Modification
A change to the scope or consideration of a lease that was not part of the original terms, such as adding or terminating the right to use additional assets, extending or shortening the lease term, or changing the lease payments. Under IFRS 16, lease modifications may be accounted for as a separate lease or require remeasurement of the existing lease liability.
Related terms: Lease Liability, Right-of-Use Asset (ROU Asset), Reassessment
Lease Portfolio
The collection of all lease agreements held by an organisation. Portfolio-level management is essential for IFRS 16 compliance, as it requires tracking lease terms, payment schedules, modifications, and reassessments across all leases. Effective lease portfolio management helps identify critical dates, optimise costs, and ensure accurate financial reporting.
Related terms: Lease Abstraction, Critical Date, IFRS 16
Lease Term
The non-cancellable period for which a lessee has the right to use an underlying asset, together with periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, and periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
Related terms: Renewal Option, Break Clause, Non-Cancellable Period
Lessee
A party that obtains the right to use an underlying asset for a period of time in exchange for consideration under a lease agreement. Under IFRS 16, the lessee recognises a right-of-use asset and a lease liability for virtually all leases, with limited exceptions for short-term and low-value leases.
Related terms: Lessor, Right-of-Use Asset (ROU Asset), Lease Liability
Lessor
The owner of property who grants the right to use the property to another party (the lessee) under a lease agreement. Under IFRS 16, lessor accounting remains largely unchanged from IAS 17 — lessors continue to classify leases as either operating leases or finance leases.
Related terms: Lessee, Head Lease, Commercial Lease
Low-Value Asset Exemption
An optional practical expedient under IFRS 16 that allows lessees to not recognise a right-of-use asset and lease liability for leases of low-value underlying assets (generally assets with a value of USD 5,000 or less when new). This exemption applies on a lease-by-lease basis regardless of materiality.
Related terms: Short-Term Lease Exemption, IFRS 16, Practical Expedient
M
Market Rent Review
A periodic reassessment of the rent payable under a commercial lease to align it with current market conditions. Common in UK commercial leases, typically occurring every 3-5 years. Under IFRS 16, future variable rent adjustments based on market reviews are not included in the initial lease liability measurement but are recognised when the adjustment takes effect.
Related terms: Rent Escalation, CPI Adjustment, Open Market Value
Modified Retrospective Approach
A transition method under IFRS 16 that allows entities to recognise the cumulative effect of applying the standard at the date of initial application without restating comparative periods. The right-of-use asset is measured at an amount equal to the lease liability, adjusted for any prepaid or accrued lease payments.
Related terms: Lease Accounting Transition, IFRS 16, Full Retrospective Approach
N
Non-Lease Component
An element within a lease contract that transfers a good or service to the lessee separately from the right to use the underlying asset. Under IFRS 16, lessees can choose to separate non-lease components (such as maintenance services) from lease components, or apply a practical expedient to account for each lease component and associated non-lease components as a single lease component.
Related terms: Service Charge, IFRS 16, Practical Expedient
O
Operating Lease
Under legacy IAS 17, a lease that did not transfer substantially all the risks and rewards of ownership to the lessee and was recorded off-balance-sheet. Under IFRS 16, the distinction between operating and finance leases for lessees has been eliminated — all leases go on-balance-sheet. The term remains relevant under ASC 842 and current FRS 102.
Related terms: Finance Lease, IFRS 16, IAS 17
P
Practical Expedient
A simplification allowed under IFRS 16 that reduces the complexity of lease accounting without materially affecting the financial statements. Key practical expedients include the option not to separate non-lease components, the short-term lease exemption, the low-value asset exemption, and the portfolio approach for similar leases.
Related terms: IFRS 16, Short-Term Lease Exemption, Low-Value Asset Exemption
Present Value
The current worth of a future sum of money or stream of cash flows, calculated by discounting at an appropriate interest rate. Under IFRS 16, the lease liability is the present value of future lease payments discounted at the relevant rate, reflecting the time value of money.
Related terms: Discount Rate, Lease Liability, Incremental Borrowing Rate (IBR)
R
Renewal Option
A contractual right for the lessee to extend the lease beyond the initial non-cancellable period. Under IFRS 16, periods covered by a renewal option are included in the lease term if the lessee is reasonably certain to exercise the option. This assessment requires judgement and should be reassessed when significant events or changes in circumstances occur.
Related terms: Lease Term, Break Clause, Reasonably Certain
Rent Escalation
A provision in a commercial lease that specifies periodic increases to the base rent. Common escalation mechanisms include fixed percentage increases, CPI-linked (inflation-indexed) adjustments, and market rent reviews. Under IFRS 16, variable lease payments linked to an index are included in the initial measurement of the lease liability.
Related terms: Base Rent, CPI Adjustment, Market Rent Review
Rent-Free Period
A period at the beginning of a lease during which the tenant is not required to pay rent. It is a common lease incentive in commercial real estate. Under IFRS 16, rent-free periods do not affect the lease liability calculation, as the total lease payments are spread over the entire lease term through the present value calculation.
Related terms: Lease Incentive, Base Rent, Lease Liability
Right-of-Use Asset (ROU Asset)
Under IFRS 16, a right-of-use asset represents the lessee's right to use an underlying asset for the lease term. It is initially measured at the amount of the lease liability, plus any initial direct costs incurred by the lessee, prepayments made, and estimated restoration costs, less any lease incentives received.
Related terms: Lease Liability, IFRS 16, Initial Direct Costs
S
Sale and Leaseback
A transaction in which an entity sells an asset and immediately leases it back from the buyer. Under IFRS 16, if the transfer of the asset satisfies IFRS 15 requirements for a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use retained.
Related terms: Right-of-Use Asset (ROU Asset), IFRS 16, Lease Liability
Service Charge
A charge payable by a commercial tenant to cover the landlord's costs of maintaining shared areas and providing services to the building, such as cleaning, security, insurance, and repairs. Service charges are typically variable and are generally excluded from the lease liability calculation under IFRS 16 as non-lease components.
Related terms: Non-Lease Component, Operating Costs, Triple Net Lease
Short-Term Lease Exemption
An optional practical expedient under IFRS 16 that allows lessees to not recognise a right-of-use asset and lease liability for leases with a term of 12 months or less at the commencement date (with no purchase option). Instead, lease payments are recognised as an expense on a straight-line basis over the lease term.
Related terms: IFRS 16, Low-Value Asset Exemption, Practical Expedient
Source Verification
The practice of linking each extracted data point back to its original location in the source document, typically by providing the page number and verbatim quote. Source verification enables auditors and reviewers to quickly validate extracted data without re-reading the entire lease document.
Related terms: Confidence Score, Lease Abstraction, Audit Trail
Sublease
An arrangement in which the original tenant (sublessor) grants a third party (sublessee) the right to use all or part of the leased property for a period within the original lease term. Under IFRS 16, the intermediate lessor classifies the sublease with reference to the right-of-use asset arising from the head lease, not the underlying asset.
Related terms: Head Lease, Lessee, Lessor
T
Tenant Improvement Allowance (TIA)
A payment or credit provided by the landlord to the tenant to cover the cost of fitting out or customising the leased space. Under IFRS 16, tenant improvement allowances received from the lessor are treated as lease incentives and reduce the initial measurement of the right-of-use asset.
Related terms: Lease Incentive, Fit-Out, Right-of-Use Asset (ROU Asset)
Triple Net Lease (NNN)
A commercial lease structure in which the tenant pays the base rent plus all operating expenses, including property taxes, building insurance, and maintenance costs. Common in the US and increasingly in European markets. The additional cost components beyond base rent may qualify as non-lease components under IFRS 16.
Related terms: Service Charge, Non-Lease Component, Base Rent
W
Weighted Average Lease Term (WALT)
A portfolio-level metric that calculates the average remaining lease term across all leases, weighted by the rental income or lettable area of each lease. WALT is a key indicator used by investors and analysts to assess the stability of rental income from a property portfolio.
Related terms: Lease Portfolio, Lease Term, Commercial Lease
Y
Yield
In commercial real estate, the annual rental income from a property expressed as a percentage of the property's capital value or purchase price. Yield is a key metric for investment analysis and is influenced by factors such as location, tenant quality, lease term, and rent review structure.
Related terms: Base Rent, Commercial Lease, Cap Rate