IFRS 16 changed lease accounting by removing the old distinction between operating and finance leases for lessees. Almost every lease now sits on the balance sheet. Here is the standard distilled to what you actually need for the exam.
The core idea
At the start of a lease, the lessee recognises two things: a right-of-use (ROU) asset and a lease liability. The liability is the present value of the future lease payments; the ROU asset starts at the same amount (plus any initial direct costs and estimated dismantling costs).
Lessee accounting at a glance
Confirm a contract conveys the right to control an identified asset.
Present value of future lease payments at the implicit rate.
Liability + initial direct costs + dismantling estimate.
Depreciate the asset; unwind interest on the liability.
The day-one journal
- Dr Right-of-use asset
- Cr Lease liability (present value of lease payments)
- Any initial direct costs are added to the ROU asset.
Subsequent measurement
- The ROU asset is depreciated, usually on a straight-line basis over the shorter of the lease term and the asset's useful life.
- The lease liability is increased by interest (using the rate implicit in the lease) and reduced by the cash payments made.
Worked example
A company leases equipment for 5 years, paying 100,000 BDT at each year-end, with an implicit rate of 10%. The present value of the payments is roughly 379,000 BDT. That figure becomes both the opening ROU asset and the opening lease liability. Each year, interest unwinds on the liability while the asset depreciates by about 75,800 BDT.
Exemptions worth remembering
Watch for the two exemptions
Short-term leases (12 months or less) and leases of low-value assets can be expensed straight to profit or loss instead of being capitalised. Examiners love to test whether you spot these — flag them whenever a scenario mentions a short or trivial lease.
