lease-accounting

Lease Accounting

name: lease-accounting description: Lease accounting — IFRS 16, ASC 842. Cover lessee model, operating vs finance, transition approaches.

When to Activate

• Accounting for new leases under IFRS 16 or ASC 842
• Classifying leases as operating vs finance (ASC 842) or applying the single lessee model (IFRS 16)
• Calculating right-of-use (ROU) assets and lease liabilities at commencement
• Handling lease modifications, remeasurements, or terminations
• Transition from legacy standards (IAS 17 / ASC 840) to current standards
• Sale-and-leaseback transactions
• Short-term and low-value lease exemptions
• Lease vs. service contract determination
• Sublease accounting and classification

Core Concepts

IFRS 16 — Lessee Model (Single Model)

IFRS 16 requires lessees to recognize virtually all leases on the balance sheet. There is no operating/finance lease distinction for lessees.

Initial recognition:

Right-of-Use (ROU) Asset = Lease liability at commencement
                         + Lease payments made at or before commencement
                         + Initial direct costs incurred by lessee
                         - Lease incentives received
                         + Estimated dismantling/restoration costs (IAS 37)

Lease Liability = Present value of future lease payments
                  Discounted at the rate implicit in the lease (if determinable)
                  Otherwise, the lessee's incremental borrowing rate (IBR)

Lease payments included:
  - Fixed payments (less lease incentives receivable)
  - Variable payments based on an index or rate (e.g., CPI-linked)
  - Amounts expected to be payable under residual value guarantees
  - Exercise price of purchase option (if reasonably certain)
  - Penalties for terminating the lease (if term reflects exercise)

Subsequent measurement:

ROU Asset:
  - Cost model (default): Cost less accumulated depreciation less impairment
  - Depreciation: Shorter of useful life and lease term (straight-line unless
    another method better reflects pattern of consumption)
  - If ownership transfers or purchase option reasonably certain: depreciate
    over useful life of underlying asset

Lease Liability:
  - Increase by interest (effective interest method)
  - Decrease by lease payments made
  - Remeasure for changes in lease term, purchase option assessment,
    or variable payments linked to index/rate

P&L Impact:
  - Depreciation expense (in operating costs)
  - Interest expense (in finance costs)
  - Total expense is front-loaded (higher interest in early periods)
  - EBITDA improves compared to old operating lease treatment