What Is Lease Accounting Under IFRS 16?
IFRS 16 replaced the old operating/finance lease split for lessees with a single on-balance-sheet model: almost every lease now creates a right-of-use asset and a matching lease liability. This guide covers how the standard works and how the numbers are calculated.
Under IFRS 16, a lessee recognizes a right-of-use (ROU) asset and a lease liability at the present value of future lease payments for (almost) all leases, then amortizes the asset and accretes interest on the liability over the lease term.
- •Recognizes a ROU asset + lease liability for nearly all leases
- •Depreciates the ROU asset over the lease term
- •Records interest expense on the lease liability
- •Few exemptions: short-term (≤12 months) and low-value assets
- •Classifies each lease as operating or finance
- •Finance lease: derecognizes the asset, recognizes a lease receivable
- •Operating lease: keeps the asset on its books, recognizes rental income straight-line
- •Largely carried over from the old IAS 17 requirements
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Step-by-step worked examples
A company leases equipment for 5 years, paying $24,000 at the end of each year. The discount rate is 5%. What is the lease liability at commencement?
Annuity PV factor = (1 − (1.05)^-5) / 0.05 = 4.3295 Lease liability = 24,000 × 4.3295 ≈ $103,908
Using the $103,908 lease liability above, with a 5-year straight-line ROU amortization and 5% interest, what is the total year-1 lease expense (depreciation + interest)?
Depreciation = 103,908 / 5 = $20,782 per year Interest (year 1) = 103,908 × 5% = $5,195 Total year-1 expense = 20,782 + 5,195 = $25,977 (higher than the $24,000 cash payment — expense is front-loaded)
A company leases a photocopier for 11 months at $500/month. Can it skip recognizing a right-of-use asset and lease liability?
Lease term = 11 months ≤ 12 months → qualifies for the short-term lease exemption No ROU asset or lease liability is recognized Instead, expense $500/month straight-line over the lease term
Flashcards
Quick quiz
Q1.Under IFRS 16, what does a lessee recognize for (almost) every lease?
Q2.5 annual payments of $24,000 at a 5% discount rate — what is the approximate lease liability?
Q3.Which lease may be exempt from ROU asset/liability recognition?
Q4.What happens to lessor accounting under IFRS 16?
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Common mistakes
Assuming IFRS 16 changed lessor accounting the same way it changed lessee accounting. — Correct: Lessors still use the dual operating/finance model; only lessee accounting was overhauled.
Using the total lease payment amount as the lease liability. — Correct: The liability is the present value of future payments, discounted at the appropriate rate — not the sum of undiscounted payments.
Recognizing a ROU asset for every short lease. — Correct: Short-term (≤12 months) and low-value asset leases can be exempted and expensed straight-line instead.
Expecting equal lease expense every year. — Correct: Interest on the liability is front-loaded, so total lease expense is higher in early years even though cash payments are level.
FAQ
What is lease accounting under IFRS 16?
It's the single lessee model requiring almost all leases to be recognized on the balance sheet as a right-of-use asset and a lease liability.
How is the lease liability calculated?
As the present value of future lease payments, discounted at the rate implicit in the lease or the lessee's incremental borrowing rate.
What discount rate is used in IFRS 16?
The rate implicit in the lease if it can be readily determined; otherwise the lessee's incremental borrowing rate.
Are there exemptions from IFRS 16 lease accounting?
Yes — short-term leases (12 months or less) and leases of low-value underlying assets can be expensed straight-line without recognizing a ROU asset.