IFRS 16 led to significant changes in the accounting of lease contracts and is a challenge for many companies.
The free Excel template from Envoria helps you understand the lease standard and shows you how to calculate contracts.
Lessee Postings
The basic postings for lease contracts based on IFRS 16 consist of four steps:
I. Initial Right of Use Asset and Lease Liability
The value of the initial Right of Use Asset is the 'present value' of all lease payments during the contract term. A lease payment is a payment that is directly related with the transfer of the leased asset. Payments that are related to other components like services are not classified as lease payments.
The posting is 'Debit: Right of Use Asset' to 'Credit: Lease Liability'.
II. Decrease of the Lease Liability
The Lease Liability gets decreased based on the payments during the contract term. Value and point in time are based on the payment itself without considering potential accruals.
The posting can be 'Debit: Lease Liability' to 'Credit: Cash'. However, in most cases, it will be to 'Credit: Lease Expense' to reduce the existing expenses on the accounts.
III. Interest Expense Posting
The difference between the sum of all payments and the present value (the initial Lease Liability/Right of Use Asset) is the Interest Expense. The Interest Expense is increasing the Lease Liability each month.
The posting usually looks like this: 'Debit: Interest Expense' to 'Credit: Lease Liability'.
IV. Right of Use Asset Depreciation
The Right of Use Asset is getting depreciated linearly in most cases. Every month has the same depreciation as long as there is no contract modification.
The posting can be 'Debit: Right of Use Asset Depreciation' to 'Credit: Right of Use Asset'.