Lessee Lease Accounting under IFRS 16: Worked Example
Worked Example · Intermediate Accounting
Lessee Lease Accounting under IFRS 16
Under IFRS 16 a lessee puts almost every lease on the balance sheet: a right-of-use (ROU) asset and a lease liability, both at the present value of the lease payments. Each payment then splits into interest (on the liability) and principal. The old “operating vs finance” split is gone for a lessee.
Worked example (lessee, IFRS 16)
Lease equipment for 5 years, $20,000 at each year-end, discount rate 6%. Lease liability = ROU asset = PV of five $20,000 payments at 6% = $84,247.
| Year | Opening | Interest 6% | Payment | Principal | Closing |
|---|---|---|---|---|---|
| 1 | 84,247 | 5,055 | 20,000 | 14,945 | 69,302 |
| 2 | 69,302 | 4,158 | 20,000 | 15,842 | 53,460 |
| 3 | 53,460 | 3,208 | 20,000 | 16,792 | 36,668 |
| 4 | 36,668 | 2,200 | 20,000 | 17,800 | 18,868 |
| 5 | 18,868 | 1,132 | 20,000 | 18,868 | 0 |
| Right-of-use asset | 84,247 | |
| Lease liability | 84,247 | |
| Interest expense + Lease liability (payment) | 5,055 + 14,945 | |
| Cash | 20,000 | |
| Depreciation expense (84,247 ÷ 5) | 16,849 | |
| Accumulated depreciation — ROU | 16,849 |
IFRS 16 vs ASPE
| IFRS 16 (lessee) | ASPE 3065 | |
|---|---|---|
| On balance sheet? | Almost always (ROU + liability) | Only finance/capital leases |
| Operating leases | No off-balance-sheet operating leases | Still expensed as incurred |
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Frequently asked questions
What’s a right-of-use asset?
The lessee’s right to use the leased item, recognized as an asset and depreciated over the lease term.
Any exemptions under IFRS 16?
Yes — short-term (≤12 months) and low-value leases can be expensed instead of capitalized.
Why split each payment?
The interest portion is an expense on the liability; the rest reduces the principal — like a mortgage payment.
