Lease accounting for lessees

A lease conveys the right to control the use of an identified asset for a period in exchange for consideration. Under IFRS 16 a lessee has a single model: almost every lease goes on the balance sheet as a right-of-use (ROU) asset and a lease liability. There is no "operating lease" category for lessees under IFRS.

Exemptions (IFRS 16.5–8) — a lessee may choose not to recognise: - short-term leases: a lease term of 12 months or less with no purchase option (elected by class of asset); - leases of low-value assets, judged on the value of the asset when new — tablets, small office furniture, phones (elected lease by lease). Cars and buildings never qualify. Payments under exempt leases are expensed, usually straight-line.

Initial measurement (IFRS 16.24–26). - Lease liability = present value of the lease payments not yet paid, discounted at the rate implicit in the lease or, if that can't be readily determined, the lessee's incremental borrowing rate. - ROU asset = lease liability + payments made at or before commencement + initial direct costs + estimated restoration costs − lease incentives received.

Subsequent measurement. - The liability works like a loan: interest = opening balance × rate (a finance cost), and each payment reduces the balance. - The ROU asset is depreciated, normally straight-line over the shorter of the lease term and the asset's useful life (IFRS 16.31–32).

So the lease cost in profit or loss is depreciation + interest — front-loaded, because interest is highest when the liability is largest. In the cash flow statement, the principal part of payments is a financing outflow.

US GAAP (ASC 842) also puts leases on the balance sheet, but lessees still classify each lease as a finance or an operating lease. A finance lease is accounted for much like IFRS 16. For an operating lease the lessee recognises a single straight-line lease cost in operating expenses; the liability is measured in the same way, and the ROU asset is the balancing figure. ASC 842 has a short-term exemption but no low-value exemption.