Lease payments
IFRS 16 ‘Leases’ sets out the principles for the recognition, measurement, presentation and disclosure of lease arrangements, transforming the way entities report leasing activities. It was introduced to address concerns about the lack of transparency under the previous leasing standard. IFRS 16 requires lessees to recognise most leases on the balance sheet through a right-of-use asset and a corresponding lease liability. This approach provides a more faithful representation of an entity’s financial position and performance, enhancing comparability and giving investors greater visibility over leverage and capital employed.
Our ‘Insights into IFRS 16’ series summaries key areas of the Standard and aims to demystify those key requirements that are challenging to apply in practice. This article considers the accounting for lease payments.
At the commencement of a lease, IFRS 16 requires a lessee to measure the lease liability at the present value of the lease payments that are not paid at that date. This liability includes both fixed payments (including in-substance fixed payments) and variable lease payments that depend on an index or rate, and represents the starting point for the measurement of the related right-of-use asset.
Deciding which payments need be recognised in the measurement of the liability and how changes in those payments are recognised often involves considerable judgement. Our article aims to help you with this judgement.
Lease payments used to measure the lease liability at commencement date include the following (to the extent they have not yet been paid):
- fixed payments, including in-substance fixed payments (described further below) less any lease incentives receivable
- variable lease payments that depend on an index or a rate (described further below)
- amounts expected to be payable by the lessee under residual value guarantees
- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option
- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
