Lease accounting: the leases that landed on the balance sheet

Lease accounting used to be a question of classification: finance leases went on the balance sheet, operating leases sat in the notes as a commitment, and a company could rent its entire premises and fleet without either appearing as an asset or a liability. IFRS 16 ended that for entities reporting under IFRS, ASC 842 did the equivalent under US GAAP, and AASB 16 and GASB 87 followed in Australia and the US public sector. The effect is that almost every lease now produces an asset and a liability, and the numbers are often larger than management expected.

What lease accounting requires now

• A right-of-use asset, representing your right to use the thing for the lease term.
• A lease liability, being the present value of the payments you are committed to.
• Depreciation of the asset and interest on the liability, replacing what used to be a single rental expense — which front-loads the total charge.
• Remeasurement when the term or the payments change, including when you exercise or stop expecting to exercise an option.
• Disclosure of maturity, of short-term and low-value exemptions taken, and of the discount rate used.

The data you actually need per lease

1. Commencement date and the lease term — including options to extend or terminate, and whether you are reasonably certain to exercise them. This judgement moves the numbers more than any other.
2. The payments: fixed, in-substance fixed, and any variable amounts that depend on an index or rate.
3. The discount rate: the rate implicit in the lease where determinable, and otherwise your incremental borrowing rate, which most companies have to construct and document.
4. Any incentives, rent-free periods, initial direct costs and restoration obligations at the end.
5. Whether the contract is a lease at all, which turns on whether you control the use of an identified asset — some service contracts contain leases and some leases do not.

The exemptions are worth using deliberately. Short-term leases of twelve months or less and leases of low-value assets can stay off balance sheet under IFRS 16, and applying them to laptops, printers and rolling monthly arrangements removes a large amount of work for no loss of information. Record the policy choice; auditors ask which exemptions you elected and whether you applied them consistently.

Where it goes wrong in practice

• Leases nobody knew about — signed locally, filed locally, and never sent to finance. The initial exercise is usually a hunt rather than a calculation.
• Option terms assessed once at transition and never revisited, so a lease that was going to end in 2027 is still measured on that basis after the business plainly intends to stay.
• The discount rate applied as a single company-wide number when the lease terms and currencies differ materially.
• Property leases with service charges bundled in, where the non-lease component should usually be separated.
• Covenants breached by the accounting rather than by the business — gearing ratios written before the standard changed, which is a conversation to have with the lender before the year end and not after.
• End-of-lease obligations forgotten entirely, particularly dilapidations on property, which are a provision as well as a lease question.

Where the schedule lives

Ettex Books carries the resulting entries, but the part that decides whether this is a week or a month of work is the register underneath: one row per lease with term, options, payments, rate and remeasurement dates, kept current as contracts change. That belongs next to the fixed asset register, since a right-of-use asset behaves much like an owned one. Ettex does not compute lease liabilities, does not select discount rates and does not apply the standards for you — for anything material this is your accountant’s work, and the rules differ between IFRS, US GAAP and national frameworks.