IFRS 16 for Corporate Real Estate: why office space is now a balance-sheet decision 

Introduction 

Under IFRS 16, office space is no longer just a cost. It is a financial commitment that sits on the balance sheet. 
As a result, unused space is no longer only inefficient: it becomes a capitalized liability. 

This is why leading organizations are not simply reducing space, but redesigning their real estate strategies around flexibility, optionality, and financial resilience. 

That shift matters because for years office leasing was treated as an operating reality more than a capital allocation issue. Rent was visible in the income statement, but much of the long-term commitment remained economically important and financially underexposed. 

IFRS 16 changed that logic. It forced a closer alignment between the economics of leasing and the accounting representation of leasing, especially for companies with large real estate footprints. 

What IFRS 16 is, and why it was introduced 

IFRS 16 is the international accounting standard on leases issued by the International Accounting Standards Board in January 2016 and effective from January 2019. It replaced IAS 17 and introduced a fundamentally new approach for lessees. 

Under the previous standard, companies classified leases as either finance or operating leases. Many office leases fell into the operating category and remained off balance sheet. 

IFRS 16 eliminated that distinction for most leases. Companies are now required to recognize: 

• a right-of-use asset 

• a corresponding lease liability 

The rationale behind this change was transparency. The IASB identified that investors lacked a clear view of companies’ financial commitments related to leasing. At the time of introduction, global lease commitments were estimated at approximately $3.3 trillion. 

Sources: 
IFRS 16 leases 
IFRS – IASB shines light on leases by bringing them onto the balance sheet ht-on-leases-by-bringing-them-onto-the-balance-sheet/ 

How the accounting mechanics changed for occupiers 

Under IFRS 16, lease accounting changes in three key ways: 

First, leases are capitalized. What was previously an operating cost becomes a balance-sheet item. 

Second, the income statement changes. Instead of a single rent expense, companies now recognize: 

• depreciation of the right-of-use asset 

• interest on the lease liability 

Third, financial metrics shift. EBITDA typically improves, while leverage increases due to the recognition of lease liabilities. 

For companies with large office portfolios, this creates a structural change: 
workspace decisions now directly impact financial reporting and capital structure. 

Source: 
IFRS – 16 leases PDF  

Why office space became strategically more sensitive under IFRS 16 

Why office space became strategically more sensitive under IFRS 16 

Office real estate is particularly impacted because it combines: 

• long lease durations 

• high fit-out investments 

• variable utilization 

In hybrid work environments, many companies are using less space than they contractually hold. Under IFRS 16, this mismatch is no longer just operational. 

If space is underutilized, companies may need to assess impairment of the right-of-use asset. This transforms unused space into a financial issue. 

In practical terms: unused office space = cost + liability + potential impairment 

Source: 
EY – Impairment for lessees that plan to reduce the use of real estate ffice-space-feb-2021.pdf 

Lease or service? Why the distinction suddenly matters 

IFRS 16 applies to leases, not to service contracts. 

This distinction has become strategically relevant. Companies are increasingly evaluating whether workspace solutions fall under: 

• lease structures (on balance sheet) 

• service models (often more flexible in accounting treatment) 

This has contributed to the growth of: 

• serviced offices 

• managed workspace solutions 

• flexible contracts 

The shift is not purely operational. It is also financial: 
organizations are reassessing how to balance long-term commitments with flexibility. 

Source: 
PWC – IFRS 16: The leases standard is changing. Are you ready? 

How IFRS 16 is changing the office leasing market 

IFRS 16 is one of several forces reshaping the office market, alongside hybrid work and changing employee expectations. 

One clear trend is the rise of flexible leasing models. Companies are increasingly integrating shorter-term and service-based solutions into their portfolios. 

CBRE reports a continued shift toward flexible office products, defined as commitments under three years, often turnkey and managed. 

This reflects a broader transformation: 

from fixed, long-term real estate commitments 
to dynamic, portfolio-based strategies 

Source: 
CBRE – Aligning landlords and operators to unlock occupier demand 

Which companies are most affected 

The impact of IFRS 16 is strongest for: 

• listed companies 

• large corporates 

• financial institutions 

• multinational organizations 

Particularly those with: 

• large office portfolios 

• long-term lease commitments 

• high capital investments in workspace 

For these companies, real estate decisions now directly influence: 

• leverage 

• financial ratios 

• capital allocation 

Source: 
KPMG – IFRS 16 – An overview 

From cost minimization to financial resilience 

The most important shift is conceptual. 

Companies are moving from: cost minimization to financial resilience 

This means: 

• reducing rigidity, not just cost 

• aligning space with real usage 

• avoiding stranded capital 

• maintaining flexibility over time 

Under IFRS 16, flexibility becomes a financial asset. 

IFRS 16 and corporate real estate in Italy 

In Italy, IFRS 16 applies primarily to companies adopting IAS/IFRS under Legislative Decree 38/2005. This includes: 

• listed companies 

• banks and financial institutions 

• certain large entities 

It does not apply to most SMEs using Italian GAAP. 

Italy also introduced specific tax coordination rules through the Ministry of Economy and Finance Decree of August 5, 2019, aligning IFRS 16 with IRES and IRAP calculations. 

Sources: 
DECRETO LEGISLATIVO 28 febbraio 2005, n. 38 
Dipartimento delle finanze – D.M. 5 agosto 2019 

From a market perspective, Italy reflects global trends. Demand is increasingly concentrated in high-quality, central locations, with strong activity from sectors such as finance, technology, and professional services. 

Source: 
JLL – Occupational trends in the Italian office leasing market by sector 

Conclusion 

IFRS 16 did not change the economic reality of office leasing. It made it visible. 

Office space is no longer just a cost. 
It is a financial commitment that affects balance sheets, flexibility, and long-term resilience. 

This is why leading organizations are not simply reducing space. 
They are redesigning their real estate strategies. 

The focus is shifting toward: 

• flexibility 

• optionality 

• financial control 

Because in today’s environment, the real question is no longer how much space a company has. 

It is how much that space constrains—or enables—its future.