IFRS 16 Lease Audit Procedures for UAE Companies Explained Now

Why IFRS 16, Not ASC 842, Governs UAE Lease Accounting Audits

UAE-incorporated companies prepare their financial statements under IFRS, not US GAAP, which means the lease accounting standard that actually governs audits here is IFRS 16, not ASC 842. The two standards share a similar goal, bringing leases onto the balance sheet, but they work differently in an important respect: IFRS 16 applies a single lessee accounting model to almost every lease, recognising a right-of-use asset and a lease liability regardless of whether the lease would once have been called an operating or a finance lease. The finance-versus-operating distinction that matters so much under ASC 842 simply does not apply the same way to a UAE lessee under IFRS 16.

This guide sets out the audit procedures and assertions auditors in the UAE actually apply when testing lease balances under IFRS 16, and the specific areas where lease accounting audits most often go wrong.

The Six Audit Assertions Applied to IFRS 16 Lease Balances

Auditors test financial statement balances against a defined set of assertions under International Standards on Auditing (ISA 315 and ISA 500). Applied to a right-of-use asset and its corresponding lease liability, these assertions look like this:

Existence

Does the lease liability and right-of-use asset genuinely exist, backed by an executed contract? Auditors confirm that a signed lease agreement supports the recognised balance, rather than relying on an internally generated schedule alone.

Completeness

Are all leases captured on the balance sheet? Under IFRS 16, this is the assertion where most errors actually occur, since it requires identifying every arrangement that meets the definition of a lease, including leases embedded inside service or supply contracts that do not use the word “lease” anywhere in the document, and confirming that any lease excluded from balance sheet recognition genuinely qualifies for the short-term or low-value exemption rather than simply being missed.

Rights and Obligations

Does the right-of-use asset represent a genuine right the company controls, and does the lease liability represent a genuine obligation the company owes? Since a lease produces a matched asset and liability, the two largely offset each other in overall balance sheet risk, but auditors still confirm that recognised leases have not already been assigned, terminated, or substantially modified without the accounting being updated.

Valuation and Measurement

Are the lease liability and right-of-use asset measured correctly? This calculation depends on the lease payment stream, the lease term (including any extension or termination option the company is reasonably certain to exercise), and the discount rate, generally the lessee’s incremental borrowing rate where the rate implicit in the lease is not readily determinable. Auditors test whether these inputs are supported by the underlying contract or independent evidence, rather than accepted at face value from a lease accounting system’s output.

Cut-off

Does the lease sit in the correct accounting period? A lease is recognised from its commencement date, when the underlying asset is made available for use, not the contract signature date or the date rental payments begin if those dates differ. Auditors test transactions on both sides of a reporting date to confirm new leases and lease modifications are recorded in the correct period.

Classification, Presentation and Disclosure

Has the lease been correctly classified as either a recognised right-of-use asset and liability, or a genuinely qualifying short-term lease (12 months or less, with no purchase option) or low-value asset lease that is expensed instead? This is the assertion that differs most from ASC 842: IFRS 16 does not ask whether a lease is a finance or operating lease for a lessee’s balance sheet treatment, since almost all leases are treated the same way. What it does ask is whether the short-term or low-value exemption has been applied correctly and consistently, and whether the required IFRS 16 disclosures, including a maturity analysis of lease liabilities, are complete.

Worked Example: Testing a Lease’s Valuation Assertion

Consider a UAE company entering a three-year office lease with fixed annual payments of AED 240,000, payable in advance, and an incremental borrowing rate of 5%. The lease liability at commencement is the present value of the three payments discounted at 5%, which comes to approximately AED 686,000. The right-of-use asset is initially measured at the same amount, adjusted for any initial direct costs, prepayments, or lease incentives received. An auditor testing this balance checks that the payment amounts and lease term used in the calculation match the signed contract, that the 5% rate is supportable given the company’s actual borrowing profile, and that the amortisation of both the lease liability (through the effective interest method) and the right-of-use asset (typically straight-line) has been applied consistently period to period. A company that discounts the same payments at an unsupported or overly favourable rate understates both the liability and the corresponding expense recognised over the lease term.

Which Leases Actually Qualify for the Short-Term or Low-Value Exemption

Since the exemption decision, not a finance-versus-operating split, is where IFRS 16 classification risk actually sits, auditors and preparers alike should test exemption claims carefully:

• Short-term lease exemption: applies only where the lease term, including any renewal period the lessee is reasonably certain to exercise, is 12 months or less at commencement, and the lease contains no purchase option. A lease renewed repeatedly in practice, even on paper-short terms, can still fail this test if renewal is effectively certain.
• Low-value asset exemption: applies to leases of assets that are low in value when new, a threshold generally applied to items such as small IT equipment or office furniture, and is assessed on the underlying asset itself, not the lease payments.
• Both exemptions are elections, not automatic outcomes. A company must apply them consistently by class of underlying asset, and an auditor should expect to see the exemption rationale documented lease by lease, not assumed as a blanket policy.

Also check: External Audit Services

Common Lease Audit Mistakes Under IFRS 16

• Missing embedded leases inside service, supply, or outsourcing contracts that never use the word “lease,” which is consistently the largest source of completeness errors in lease accounting audits.
• Applying the short-term exemption to a lease with a de facto renewal that should have been treated as reasonably certain, understating the lease liability significantly over the true term of use.
• Using an unsupported discount rate rather than a documented incremental borrowing rate tied to the company’s actual cost of borrowing for a similar term and security.
• Failing to update the lease liability and right-of-use asset for a modification, such as a rent renegotiation or an extended term, treating the original schedule as still valid after the underlying agreement has changed.
• Treating the lease register as complete simply because it matches the accounting software, without independently confirming the software was fed every lease the business actually holds.

Easing Internal Control Testing on Lease Balances

Companies using a dedicated lease accounting system can meaningfully reduce the audit testing required on their lease balances by obtaining a SOC 1 Type 2 report covering the period under audit. This report gives independent assurance over the software’s logical access and program change controls during the period, which auditors can rely on in place of testing those IT controls themselves, though the underlying lease data, payment terms, and discount rate assumptions still require substantive testing regardless of the system’s control environment.

Building Internal Controls That Support Lease Completeness

Documented internal controls make the biggest practical difference to a company’s ability to demonstrate completeness under IFRS 16. A centralised contracting process that flags any new contract containing an asset-use arrangement, rather than relying on individual departments to self-report leases, closes the most common gap auditors find. Where contracting is decentralised across business units, periodically surveying finance and operations teams to identify newly signed or renewed leases is a workable, if less reliable, alternative to a centralised intake process.

The cost of getting this wrong is not limited to the audit opinion itself. A material lease completeness error found late in an audit can delay sign-off, trigger additional substantive testing across the whole lease population rather than a sample, and, for a listed or regulated entity, raise questions from the audit committee about the wider control environment rather than being treated as an isolated item.

Related: Internal Audit Services

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Correctly identifying, measuring, and classifying leases under IFRS 16 is one of the more technical areas of a statutory audit, and errors here tend to concentrate in completeness and valuation rather than obvious presentation mistakes.

Contact Farahat & Co. today to discuss your lease accounting and audit requirements.