How IFRS 16 changes lease recognition, measurement and financial statement presentation.
Luca Briefs1/8
Lease accounting
Your lease payment is only part of the story
IFRS 16 brings nearly all lessee leases onto the balance sheet as a right-of-use asset and a lease liability.
Initial measurement
Start with the future payments
Measure the liability at the present value of future lease payments. Use the implicit rate or, if it cannot be readily determined, the incremental borrowing rate.
Subsequent measurement
Three movements to track
1Depreciate the right-of-use asset.
2Recognise interest on the opening lease liability.
3Split payments between interest and principal.
Interest pattern
Interest is heavier in the early years
Interest expense is highest at the start and declines over time. Interest and depreciation replace the straight-line operating lease expense.
Quick check
Must every lease be recognised this way?
No
Optional exemptions cover leases of 12 months or less with no purchase option, and assets of low value when new. Entities applying them must disclose the expense recognised.
Practical challenge
Check the payment pattern and dates
Stepped rents and rent-free periods affect measurement. A mid-month start requires pro-rata depreciation and interest for the first and last periods.
Reporting effect
The financial statements change
Assets and liabilities increase. Depreciation and interest produce higher total expense in early years and lower expense in later years, although the underlying lease economics have not changed.
