Susan Maina is a content writer at Mugo and Company, where she simplifies Accounting, Auditing, and Forensic Audit services with her finance expertise.
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Let’s start with a simple question:
If your business in Kenya rents:
How should you record those leases in your books?
That’s the question IFRS 16 – Leases helps you answer.
IFRS 16 in Kenya is one of the key accounting standards under the International Financial Reporting Standards (IFRS) framework.
It sets out how businesses should record leases — in a way that gives a true and fair picture of their financial position.
Before IFRS 16, many companies simply recorded lease payments as expenses and moved on.
Now, businesses must show:
This helps banks, investors, and regulators see the real picture of what your business owns — and owes.
In this guide, Mugo & Co explains IFRS 16 in Kenya and how it affects your business using simple easy-to understand examples.
Not sure how IFRS 16 applies to your leases in Kenya?
Request your FREE IFRS Consultation with Mugo & Co todayBefore we go further, here are a few key terms you’ll keep seeing under IFRS 16 in Kenya.
Understanding these first makes everything else much simpler.
| IFRS 16 IN KENYA -TERMS DEFINITION | |
|---|---|
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Lease:
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– A lease is an agreement where one party (the lessee) pays another (the lessor) for the right to use an asset — like a car, office, or piece of equipment — for a certain period of time. In short: you don’t own it, but you can use it for an agreed time. |
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Lessor:
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– The lessor is the owner of the asset — the person or company that gives someone else the right to use it in exchange for payment. Example: A car hire company, landlord, or equipment supplier. |
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Lessee:
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– The lessee is the person or business using the leased asset and paying for that right. Example: A company renting an office space or leasing delivery vans. |
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Right-of-Use Asset:
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– This is the value of your right to use a leased asset — it’s recorded as an asset on your balance sheet. |
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Lease Liability:
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– This is what you owe for that asset — the total future payments you’re committed to, shown as a liability on your balance sheet.
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With these terms clear, let’s break down IFRS 16 in simple language.
Think of IFRS 16 as your rulebook for leases.
It says:
“If your business uses something that belongs to someone else — like a car, office, or piece of equipment — for a period of time, and you pay for that right, then you probably have a lease.”
And if you have a lease, you need to show two things in your financial statements:
In short: IFRS 16 wants your leases to appear on your balance sheet — showing both what you control and what you owe.
Let Mugo & Co. guide you through IFRS 16 step-by-step.
Request your FREE IFRS Consultation with Mugo & Co todayLet’s say you run Nairobi Deliveries Ltd, and you lease three vans for three years from a car hire company.
Each van costs KSh 80,000 per month.
Before IFRS 16:
That meant the vans didn’t appear anywhere on your balance sheet — even though you were using them every day to deliver goods and generate revenue.
Under IFRS 16, things have changed.
Now you must:
This gives anyone reading your accounts — like your bank, auditor, or investor — a much clearer picture of what your business controls and owes.
In short: IFRS 16 in Kenya turns your leases into visible assets and obligations, making your financial position more transparent.
We’ll show you the right way to calculate and report your lease assets and liabilities.
Request your FREE IFRS Consultation with Mugo & Co todayBefore IFRS 16, businesses followed IAS 17 – Leases, an older accounting standard with a two-model approach.
Under IAS 17, leases were classified into two types:
| Types of Leases under IAS 17 | |
|---|---|
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Finance Leases
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recorded on the balance sheet, because they transferred most of the risks and rewards of ownership.
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Operating Leases
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kept off the balance sheet, since they were seen as simple rental agreements.
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However, this approach caused a lot of confusion and inconsistency.
i.e Two Kenyan companies could lease the exact same office space in Westlands — yet one would show a lease asset and liability, while the other would only show a rent expense.
That made it hard for investors, lenders, and regulators to compare financial statements fairly.
To solve this, IFRS 16 – Leases replaced IAS 17 and introduced a single model for lessees.
Now under IFRS 16 – Leases, almost all leases must appear on the balance sheet — showing both:
In short: IFRS 16 brings transparency and consistency — ensuring that every company records its leases in the same, fair way.
If you’ve been wondering how IFRS 16 changed lease accounting in Kenya, here’s a simple way to think about it:
| Point | IAS 17 – Old Way | IFRS 16 – New Way |
|---|---|---|
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Balance Sheet |
– Some leases were hidden – you didn’t always see them.
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– Almost all leases show up – now people can see both the asset and what you owe.
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Lease Treatment
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– It recognized only Two types: * finance leases (on the books) and operating leases (off the books). |
– One clear model for almost everything – much less confusing.
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Transparency |
– Hard to know the full picture of your lease obligations.
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– Gives a clear view of what your business controls and owes.
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Cash Flow Reporting
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– Just recorded as rent expense each month.
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– Split into depreciation + interest – so it shows the real cost over time.
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Our experts help you implement IFRS 16 correctly and consistently across your business.
Request your FREE IFRS Consultation with Mugo & Co todayThe journey to IFRS 16 – Leases has been a long one — evolving over decades as businesses and regulators pushed for more transparent financial reporting.
| Year | Development |
|---|---|
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1982
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IAS 17 (Accounting for Leases) introduced — the first international standard defining how to account for leases.
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1997 – 2004
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Several revisions and interpretations added to clarify how different types of leases should be treated.
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2016 |
The International Accounting Standards Board (IASB) issued IFRS 16 – Leases, replacing IAS 17.
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2019
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IFRS 16 became effective globally for all entities reporting under full IFRS.
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2019 (Kenya)
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The Institute of Certified Public Accountants of Kenya (ICPAK) formally adopted IFRS 16, making it mandatory for all Kenyan companies preparing financial statements under full IFRS.
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In short: 2019 marked a major shift in Kenya’s financial reporting — from off-balance-sheet lease accounting under IAS 17, to full transparency under IFRS 16.
IFRS 16 applies broadly to most lease contracts — but not to every type of agreement.
In simple terms, if your business pays to use an asset that you don’t own, IFRS 16 likely applies to you.
| IFRS 16 in Kenya Applies To: | IFRS 16 in Kenya Does Not Apply To: |
|---|---|
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– Office, warehouse, or retail property leases – Vehicle leases (e.g. delivery vans, company cars, lorries) – Equipment or machinery leases used in production or operations – IT hardware leases, such as servers or photocopiers |
– Exploration leases for oil, gas, or minerals
– Biological assets, such as livestock or crops – Licences for movies, patents, or intellectual property – Service concession arrangements (e.g. public-private partnerships) – Pure service contracts, where you pay for a service, not the right to use an asset |
In other words, if your Kenyan business rents or leases something tangible — like an office, a warehouse, or company vehicles — IFRS 16 almost certainly applies to you.
It’s less about what you call the contract and more about what rights it gives you.
The main goal of IFRS 16-Leases is transparency — giving a clearer, more complete picture of a business’s true financial position.
Under the old system, lease payments often sat quietly in the expense column, hiding the fact that a company was using valuable assets and taking on long-term obligations.
IFRS 16 in Kenya changes that.
It ensures your financial statements now:
In other words, IFRS 16 tells the real story — helping investors, auditors, and lenders see what your business actually controls, what it owes, and how those leases impact your future cash flows.
Not all leases are treated the same under IFRS 16.
To keep things practical, the standard gives businesses a few simplifying exemptions — especially useful for smaller Kenyan companies or short-term arrangements.
| LEASES EXEMPTED UNDER IFRS 16 IN KENYA INCLUDE: |
|---|
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Exemption 1: Short-Term Leases – These are leases that last 12 months or less and don’t include an option to buy the asset. For example: leasing a delivery van for 10 months or renting a temporary storage space for half a year. |
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Exemption 2: Low-Value Assets These cover items that are relatively inexpensive, such as: – Small office printers or copiers – Laptops or desktop computers – Office chairs, tables, or minor equipment |
If your lease falls into either of these categories, you can keep doing what you used to — simply record the lease payments as expenses in your profit and loss statement.
In short: IFRS 16 focuses on significant leases — the ones that meaningfully affect your business’s assets and obligations.
Not every contract that mentions “rent” or “use” automatically counts as a lease.
Under IFRS 16, a contract is considered a lease if it meets these simple conditions:
| IFRS 16 in Kenya Lease Conditions: |
|---|
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1. Identifies a specific asset
for example, one delivery van, one office space, or one piece of machinery.
2. Gives you the right to use that asset for a defined period.
3. Lets you control how the asset is used (not the owner or supplier). 4. Allows you to benefit from using it
such as earning income or delivering services. 5. Requires payment in exchange for that right. |
If all five apply — congratulations, you have a lease under IFRS 16!
Tip:
Always review your contracts carefully. Even service or rental agreements might qualify as leases under IFRS 16, depending on the level of control and use involved.
Let’s use a quick case study.
Case Study: Nairobi Deliveries Ltd
You lease 3 delivery vans for 3 years at KSh 80,000 per van per month from a local car hire company.
Under the old IAS 17, you’d simply record KSh 240,000 every month as “rent expense.”
That was it.
But under IFRS 16, here’s what changes — and how you calculate it.
| How is IFRS 16 - Leases Calculated in Kenya |
|---|
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Step 1: Determine Your Total Lease Payments
So, total monthly lease cost =
Over 3 years (36 months):
You’ll pay KSh 8.64 million over the full lease period.
That’s the starting point — what you’ve agreed to pay in total. |
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Step 2: Discount to Today’s Value (Bring Future Payments to Today’s Value)
IFRS 16 says you shouldn’t record the full future amount — instead, you record what that total is worth today (this is called “present value”).
To get that number, you use your borrowing rate — basically, the interest rate your business would pay if you took a loan to buy the vans.
Let’s assume 10% per year.
|
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Step 3: Record the Right-of-Use Asset
You now record a Right-of-Use Asset for the same amount — KSh 7.1 million.
This shows that you’re using vans worth that much value over time.
Your balance sheet now shows:
|
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Step 4: Monthly Accounting
Each month, instead of one “rent expense,” you’ll now record two entries:
So your income statement now shows depreciation + interest, not “rent.” |
Under IFRS 16, you’re recognising both the asset you use and the money you owe for it — giving banks, auditors, and investors a much clearer view of your real financial position.
In Kenya, IFRS 16 applies to any organisation that prepares its financial statements under full IFRS.
That typically includes:
If your business follows IFRS for SMEs, you’re not required to apply IFRS 16.
However, many Kenyan SMEs still choose to adopt it voluntarily — to strengthen transparency, improve creditworthiness, and build investor or donor confidence.
In short:
– If you report under full IFRS, IFRS 16 isn’t optional — it’s mandatory.
– If you use IFRS for SMEs, it’s a smart best practice, but not a must.
Kenya, through the Institute of Certified Public Accountants of Kenya (ICPAK), officially adopted IFRS 16 – Leases in 2019.
Since then, many Kenyan companies — especially those listed on the NSE and large private firms — have had to make major adjustments to align with the new standard.
That meant:
This transition wasn’t just a technical exercise — it was a major mindset shift from off-balance-sheet lease reporting to full visibility of assets and obligations.
At Mugo & Co, we help Kenyan businesses implement IFRS 16 smoothly — ensuring compliance, accuracy, and clarity in financial reporting.
While IFRS 16 has improved transparency, many Kenyan companies have found implementation to be more complex than expected.
Here are some of the most common challenges businesses face:
| CHALLENGES FACING IFRS 16 - LEASES IMPLEMENTATION IN KENYA | |
|---|---|
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1. Identifying All Lease Contracts
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– Many organisations discovered that leases were hidden inside service agreements — like vehicle hire, equipment maintenance, or office fit-outs.
– Finding and classifying these correctly under IFRS 16 has been a major hurdle. |
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2. Calculating Lease Liabilities
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– IFRS 16 requires discounting future lease payments to present value — a process that needs accurate data, interest rates, and specialised accounting tools. – For businesses without modern systems, this can be time-consuming and error-prone. |
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3. Updating Accounting Systems
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– Older accounting software often doesn’t support right-of-use assets or lease liability tracking. – Many Kenyan firms have had to upgrade or customise their systems to handle IFRS 16 reporting. |
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4. Staff Training and Awareness |
– Finance teams needed time and training to understand how IFRS 16 affects journal entries, depreciation, and interest calculations. – This learning curve has been steep for smaller or mid-sized businesses. |
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5. Impact on Financial Ratios and Bank Covenants
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– Since leases now appear on the balance sheet, debt levels and profitability ratios can change significantly. – Some Kenyan companies have had to renegotiate bank covenants or explain these changes to investors and regulators. |
Mugo & Co. can help you interpret and apply IFRS 16 confidently in your business
Request your FREE IFRS Consultation with Mugo & Co todayQ1: What is IFRS 16 – Leases in simple terms?
Q2: What did IFRS 16 replace?
Q3: When was IFRS 16 implemented in Kenya?
Q4: Who must follow IFRS 16 in Kenya?
Q5: Why does IFRS 16 -Leases matter in Kenya?
Q6: What is the difference between renting and leasing?
Q7: What is the difference between IFRS 15 and IFRS 16?
Want to learn more about IFRS 15 in Kenya? Check out our simple guide here: IFRS 15 – Revenue Recognition in Kenya
IFRS 16 in Kenya is all about clarity and honesty in your financial reporting.
It ensures your accounts clearly show:
Whether you lease an office in Upper Hill, vans for your delivery team, or machinery for your workshop, IFRS 16 gives investors, banks, and auditors a true picture of your financial position.
If you’re unsure how to implement IFRS 16 or calculate right-of-use assets:
Request your FREE IFRS Consultation with Mugo & Co today.
Our experts will guide you step-by-step, ensuring your reports meet both IFRS and ICPAK standards.
Work with Mugo & Co. for clear, consistent, and compliant lease accounting in Kenya.
Request your FREE IFRS Consultation with Mugo & Co todayThis guide is for general informational purposes only and does not replace professional advice.
Always consult a qualified accountant or auidtor like Mugo & Co for guidance specific to your business.
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-16-leases/
https://www.iasplus.com/en/standards/ifrs/ifrs-16
https://www.pkfea.com/media/30wfh3pj/lease_ifrs_16.pdf
https://www.pwc.com/pg/en/publications/ifrs-news/in-depth-ifrs16.html
https://www.pwc.com/pg/en/publications/ifrs-news/in-depth-ifrs16.pdf
IFRS 15 in Kenya – Revenue from Contracts with Customers (Simple Guide)
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