Liabilities and equity
Lease accounting (IFRS 16)
Measure the lease liability and right-of-use asset and follow them over the term.
Rate implicit in the lease, or the incremental borrowing rate.
| Lease liabilitypresent value of the 5 payments | 101,096.73 |
| Add: initial direct costs | 1,500.00 |
| Right-of-use asset | 102,596.73 |
Initial recognition
| Date | Account | Debit | Credit |
|---|---|---|---|
| 1560Right-of-use assets | 102,596.73 | ||
| 2520Lease liabilities | 101,096.73 | ||
| 1000Cash at bank | 1,500.00 | ||
| Recognise the right-of-use asset and lease liability; initial direct costs paid | |||
| Year | Opening liability | Interest | Payment (end) | Closing liability | Depreciation | P&L charge | Charge − payment |
|---|---|---|---|---|---|---|---|
| 1 | 101,096.73 | 6,065.80 | (24,000.00) | 83,162.53 | 20,519.35 | 26,585.15 | +2,585.15 |
| 2 | 83,162.53 | 4,989.75 | (24,000.00) | 64,152.28 | 20,519.35 | 25,509.10 | +1,509.10 |
| 3 | 64,152.28 | 3,849.14 | (24,000.00) | 44,001.42 | 20,519.35 | 24,368.49 | +368.49 |
| 4 | 44,001.42 | 2,640.09 | (24,000.00) | 22,641.51 | 20,519.35 | 23,159.44 | −840.56 |
| 5 | 22,641.51 | 1,358.49 | (24,000.00) | 0.00 | 20,519.33 | 21,877.82 | −2,122.18 |
| Total | 18,903.27 | (120,000.00) | 102,596.73 | 121,500.00 | 1,500.00 |
The total charge equals the payments plus initial direct costs, but it is front-loaded: interest is highest while the liability is largest, so early years carry more expense than the cash paid. Depreciation is straight-line over the lease term.
Year 1 entries
| Date | Account | Debit | Credit |
|---|---|---|---|
| 7000Interest expense | 6,065.80 | ||
| 2520Lease liabilities | 6,065.80 | ||
| Interest on the lease liability | |||
| 2520Lease liabilities | 24,000.00 | ||
| 1000Cash at bank | 24,000.00 | ||
| Lease payment at the end of year 1 | |||
| 6500Depreciation expense | 20,519.35 | ||
| 1561Accumulated depreciation — right-of-use assets | 20,519.35 | ||
| Depreciation of the right-of-use asset | |||
Exemptions (IFRS 16). A lessee may choose not to recognise leases of 12 months or less (short-term) or of low-value assets; their payments are expensed on a straight-line basis (account 6150).
US GAAP (ASC 842). Lessees also recognise a right-of-use asset and a lease liability, but classify each lease as a finance or an operating lease. A finance lease is accounted for much as shown here; an operating lease produces a single straight-line lease cost in profit or loss.
Learn it properly
- Lease accounting for lessees · Liabilities and Equity
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