Lease Contract Management per Ejar Platform & IFRS 16 Standard via ERP

Why Lease Contracts Deserve Their Own Process

Almost every Saudi company leases something. Retailers lease mall units, distributors lease warehouses in Riyadh, Dammam and Jeddah, contractors lease heavy equipment and labor accommodation, and many businesses run vehicle fleets on multi-year agreements. Taken together, leases are often one of the three largest cost lines after payroll and purchases. Yet in many finance teams they live in a folder of scanned contracts and a spreadsheet that one person maintains.

That arrangement breaks down for two reasons. First, companies reporting under full IFRS must apply IFRS 16, which treats leases very differently from a monthly rent expense. Second, leases in the Kingdom are documented on the Ejar platform, so there is an official record of each contract that your books should agree with. This guide explains the standard with worked numbers, ties it to the local rules, and shows how an ERP system handles a lease from signature to exit.

Who Applies IFRS 16 in Saudi Arabia?

SOCPA, the Saudi Organization for Chartered and Professional Accountants, endorsed IFRS for listed entities from 2017 and for other entities from 2018, with eligible entities allowed to use the IFRS for SMEs Accounting Standard instead. IFRS 16 itself replaced IAS 17 and applies to annual periods beginning on or after 1 January 2019.

One point is often missed. Entities on IFRS for SMEs do not apply the IFRS 16 model. The third edition of IFRS for SMEs, issued in February 2025 and effective from 1 January 2027, deliberately left lease accounting as it was; the IASB judged that introducing the IFRS 16 model now would be too heavy a burden for smaller entities and said it would revisit the question at the next comprehensive review. So the first step is simply to confirm which framework your company reports under. If it is full IFRS, everything below applies. If it is IFRS for SMEs, the contract management, Ejar reconciliation and alerting sections still apply, but the accounting differs.

What IFRS 16 Actually Changed

Under IAS 17, a lessee classified each lease as either a finance lease, which went on the balance sheet, or an operating lease, which was expensed as rent with nothing recognized on the balance sheet. Most office, showroom and warehouse leases were operating leases, which meant large commitments sat entirely off balance sheet.

IFRS 16 removed that distinction for lessees. Unless an exemption applies, every lease produces two balances:

• A right-of-use (ROU) asset representing the right to use the warehouse, vehicle or machine for the lease term.
• A lease liability representing the present value of the payments still to be made.

Lessor accounting stayed largely the same: lessors still classify leases as operating or finance. The heavy lifting falls on companies in their role as tenants.

The Two Optional Exemptions

A lessee may choose to keep two kinds of lease off balance sheet and expense the payments on a straight-line basis:

• Short-term leases: a term of 12 months or less with no purchase option. The election is made by class of underlying asset, so if you apply it to vehicles, it applies to all short vehicle leases.
• Low-value assets: the standard sets no number, but the Basis for Conclusions refers to assets worth roughly USD 5,000 or less when new, such as laptops, phones and small office furniture. This election is made lease by lease.

Be careful with annual contracts that renew automatically. If the company is reasonably certain to keep renewing, the accounting lease term includes those renewal periods and the short-term exemption is not available. This matters more in Saudi Arabia since the rental relationship provisions of September 2025 made automatic renewal the default across the Kingdom unless a non-renewal notice is given at least 60 days before expiry.

Measuring the Liability and the Asset

Lease liability

At commencement, the liability is the present value of lease payments not yet paid. Those payments include fixed rent, variable payments linked to an index or rate, and the exercise price of purchase or extension options you are reasonably certain to exercise. Variable payments tied to sales or usage, such as a percentage of a showroom's turnover, stay out of the liability and are expensed when incurred.

The discount rate is the rate implicit in the lease if it can be readily determined, which is rare for property, and otherwise the lessee's incremental borrowing rate: what the company would pay to borrow a similar amount, over a similar term, with similar security. Document how you set it. Auditors will ask.

Right-of-use asset

The ROU asset starts at the amount of the liability, plus any payments made at or before commencement, plus initial direct costs such as broker commission, plus an estimate of restoration costs if the contract requires you to return the premises in original condition, minus lease incentives such as rent-free months. It is then usually depreciated straight-line over the shorter of the lease term and the asset's useful life, and tested for impairment like any other asset.

Worked Example: A Five-Year Warehouse Lease

Consider a hypothetical distributor that leases a warehouse in Dammam for five years at SAR 200,000 a year, paid at the end of each year. Its incremental borrowing rate is estimated at 6%. There are no incentives or direct costs, to keep the numbers clean.

The present value of five annual payments of SAR 200,000 at 6% is about SAR 842,473. That is the opening liability and the opening ROU asset. Annual depreciation is 842,473 ÷ 5 = SAR 168,495.

Three things stand out. Total expense over five years is SAR 1,000,000, exactly the total rent; IFRS 16 changes timing, not the total. Year one carries SAR 219,043 of expense against SAR 200,000 under the old approach, so profit is lower early in the lease and higher later. And on day one the balance sheet gains SAR 842,473 of liabilities, enough to move the leverage ratios your bank watches.

Journal entries

• Commencement: Dr Right-of-use asset 842,473; Cr Lease liability 842,473.
• Year-end interest: Dr Lease interest expense 50,548; Cr Lease liability 50,548.
• Payment: Dr Lease liability 200,000; Cr Bank 200,000.
• Depreciation: Dr Depreciation expense, ROU assets 168,495; Cr Accumulated depreciation, ROU assets 168,495.

In practice, Saudi commercial rent is commonly paid in advance, annually or semi-annually. A payment made on the commencement date is not part of the liability; it goes straight into the ROU asset. That changes the schedule, so build each lease from its actual payment dates rather than from a template.

VAT on Lease Payments

Residential leases are exempt from VAT, and the landlord cannot recover input VAT on related costs. Commercial leases of offices, showrooms and warehouses are taxable at the standard 15% rate. For the tenant, recoverable VAT is not a lease payment for IFRS 16 purposes; it goes to the input VAT account when a valid tax invoice arrives. Without a proper tax invoice from a VAT-registered landlord there is nothing to recover, and individual landlords are not always diligent about issuing them, so check each payment.

Example: a showroom lease of SAR 200,000 a year plus VAT is invoiced at SAR 230,000. Only SAR 200,000 enters the IFRS 16 model; SAR 30,000 is input VAT.

What Ejar Means for Finance Teams

Ejar was launched in 2018, and all residential and commercial leases must be registered on it. A lease registered on the unified tenancy contract is an enforcement instrument at the Enforcement Courts, and leases of ten years or more must also be annotated on the title deed. Since 15 January 2024, residential rent must be paid through Ejar's digital channels; that requirement has not yet been extended to commercial rent.

On 25 September 2025 new rental relationship provisions took effect. They froze rents in the Riyadh urban area for five years for residential and commercial property, made automatic renewal the Kingdom-wide default unless notice of non-renewal is given at least 60 days before expiry, and required landlords to register leases not yet on Ejar.

The accounting consequences are practical:

• Lease term: automatic renewal strengthens the case that a tenant is reasonably certain to stay, which can lengthen the accounting term and raise the liability.
• Payment estimates: the Riyadh rent freeze makes payment schedules more predictable during the freeze period.
• Reconciliation: term, rent and payment dates on Ejar should match your system. A mismatch usually means a data entry error or an amendment nobody told finance about.

Modifications and Remeasurement

Leases rarely stay as signed. Tenants give back space, extend terms or renegotiate rent, and each change needs the right treatment:

• Additional space at a stand-alone price: taking an extra floor at market rent is accounted for as a separate lease.
• Extension or rent change: remeasure the liability using the revised payments and an updated discount rate, and adjust the ROU asset by the difference.
• Reduction in scope: giving back half a warehouse reduces both asset and liability proportionately, with any difference recognized in profit or loss.

Hypothetically, two years into the Dammam lease the distributor agrees a two-year extension at the same rent, and its borrowing rate is now 7%. Five remaining payments discounted at 7% come to about SAR 820,040, against a carrying liability of SAR 534,602. The difference of SAR 285,438 is added to both the liability and the ROU asset, and the revised asset is depreciated over the new remaining term. Doing this by hand across dozens of contracts is where errors accumulate.

Contracts to Look For

The last row catches companies out. A storage agreement with a logistics provider may be a plain service, or it may contain a lease if you have a specified area the provider cannot substitute and you direct how it is used. Your lease inventory should cover these cases, not only contracts with the word "lease" on the cover.

Common Mistakes

1. Incomplete inventory: relying on the rent expense account misses prepaid leases and contracts booked under other headings.
2. Undocumented discount rates: one rate for every contract regardless of term or security.
3. Ignoring renewals: treating rolling annual leases as short-term when the company has occupied the site for years.
4. Including VAT in payments: inflating the asset and liability by 15%.
5. Missed modifications: extensions and surrenders that reach finance only at year-end.
6. Misusing the low-value exemption: applying it to vehicles or equipment that clearly do not qualify.

How an ERP Runs the Lease Lifecycle

A spreadsheet copes with two or three leases. At twenty leases with different payment dates, amendments and branches, you need one system holding both the contract data and the accounting. A workable setup looks like this:

1. Single lease register: each contract records the landlord, the Ejar contract number, term, payment schedule, renewal and termination options, and the branch or cost center.
2. Payment and notice alerts: reminders before each payment and well ahead of the non-renewal deadline, because missing the 60-day window means automatic renewal.
3. Purchasing and payments link: the landlord's invoice is posted with input VAT separated, and the payment reduces the liability directly.
4. Cost center allocation: ROU depreciation and lease interest are charged to the branch or project that uses the premises, so each location carries its true occupancy cost.
5. Reporting: ROU asset movements, liability maturity analysis and short-term lease expense for disclosures.

In Tranquil, the property management module handles properties, units, tenants and contracts, which is especially useful for companies that also lease property out. It works with accounting and finance, where the entries are posted, and ROU assets can be tracked in asset management, which calculates depreciation automatically in line with accounting standards. For the fundamentals of depreciation see our guide to asset depreciation, and for how these balances appear in the statements see our article on the balance sheet.

A Four-Stage Rollout

1. Inventory

Collect contracts from every department and branch, then reconcile them to Ejar and to the last twelve months of expense postings. Any recurring payment to one party without a contract on file deserves a question.

2. Accounting decisions

Decide which exemptions apply to which asset classes, how the incremental borrowing rate is set, and how renewal options are assessed. Record each decision in an accounting policy memo signed off by the CFO.

3. Data entry and calculation

Load the leases with their actual payment schedules, calculate opening balances, and test a sample by hand before posting.

4. Monthly operation

Make interest, depreciation and payments part of the monthly close, and review amendments and renewals quarterly with whoever manages facilities.

Frequently Asked Questions

Does every Saudi company have to apply IFRS 16?

No. It applies to entities reporting under full IFRS, including listed companies. Entities using IFRS for SMEs follow different lease rules, and the 2025 third edition did not adopt the IFRS 16 model.

Does IFRS 16 increase total lease cost?

No. Total expense over the term equals total payments, but the expense is higher in early years and lower later because interest is charged on a declining liability.

Is VAT included in the lease liability?

Recoverable VAT on commercial rent is not; it is recorded as input VAT. Residential rent is VAT exempt.

How should we treat an annual lease that renews automatically?

Assess whether you are reasonably certain to keep renewing. If so, include the expected renewal periods in the lease term; the short-term exemption then does not apply.

Can Tranquil connect lease contracts to the accounts?

Yes. Property management covers contracts and tenants and links to accounting and finance, with reports and approvals customizable to your process. Talk to the Tranquil team about setting up your leases.