Accounting technology / Glossary / Lease accounting

What is lease accounting?

Definition

Lease accounting is how a business records leases of property, vehicles and equipment in its accounts. Under current standards, IFRS 16 and ASC 842, a lessee records most leases on the balance sheet as a right-of-use asset and a matching lease liability, rather than simply expensing the rent as it is paid.

Also calledleasing accountinglessee accounting

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Lessee records: Right-of-use asset and lease liability
Standards: IFRS 16, ASC 842, FRS 102
Common exemptions: Short-term and low-value leases

How lease accounting works

At the start of a lease, the lessee measures the lease liability as the present value of the lease payments, discounted at the rate implicit in the lease or, if that cannot be found, its incremental borrowing rate. The right-of-use asset starts at the same amount, adjusted for upfront payments, incentives and direct costs. Afterwards the liability accrues interest and falls as payments are made, and the asset is depreciated. Changes to term or payments trigger a remeasurement. IFRS 16 has applied since 1 January 2019 and treats nearly every lessee lease the same way. US GAAP's ASC 842 keeps two types: finance leases, accounted for like IFRS 16, and operating leases, which show a single straight-line lease cost. FRS 102 moves to an on-balance-sheet model for periods from 1 January 2026. Software holds the lease register and calculates schedules and journals.

Common questions

Why did leases move onto the balance sheet?+

Under older standards, operating leases were off balance sheet, so large rent commitments did not appear as debt. The new standards show the obligation and the asset so companies can be compared fairly.

What discount rate is used for a lease?+

The rate implicit in the lease if it can be readily determined; otherwise the lessee's incremental borrowing rate, the rate it would pay to borrow over a similar term with similar security.

What is a lease modification?+

A change to a lease's scope, term or payments that was not in the original terms. The lessee remeasures the liability using a revised discount rate and adjusts the right-of-use asset.