Under IFRS 16, how is a lessee’s accounting treatment for most leases described?

Under IFRS 16, how is a lessee’s accounting treatment for most leases described?

• A. All leases are capitalized, recognizing a right-of-use asset and lease liability, with exceptions for short-term and low-value leases for which payments are expensed as incurred.
• B. Only finance leases are recognized with a right-of-use asset; operating leases are expensed.
• C. Leases are not recognized until payments are due.
• D. The lessor determines whether the lease is finance or operating.

Answer: (A)

Under IFRS 16, the typical lessee recognizes almost all leases on the balance sheet. At the start of the lease, you record a right-of-use asset and a lease liability. The lease liability is the present value of the future lease payments during the lease term, discounted at the rate you would borrow to acquire the asset (the rate implicit in the lease if readily determinable, otherwise your incremental borrowing rate). The right-of-use asset is initially the same amount as the lease liability, plus any initial direct costs, minus any lease incentives received, and adjusted for prepaid or accrued payments as needed. After commencement, you depreciate the right-of-use asset and recognize interest on the lease liability, while lease payments reduce the liability. There is an exception for short-term leases (12 months or less) and leases of low-value assets: for those, you may expense the payments as incurred instead of recognizing a right-of-use asset and lease liability. This is why most leases are shown on the balance sheet, with exemptions only for those specific short-term or low-value cases.

Under IFRS 16, the typical lessee recognizes almost all leases on the balance sheet. At the start of the lease, you record a right-of-use asset and a lease liability. The lease liability is the present value of the future lease payments during the lease term, discounted at the rate you would borrow to acquire the asset (the rate implicit in the lease if readily determinable, otherwise your incremental borrowing rate). The right-of-use asset is initially the same amount as the lease liability, plus any initial direct costs, minus any lease incentives received, and adjusted for prepaid or accrued payments as needed. After commencement, you depreciate the right-of-use asset and recognize interest on the lease liability, while lease payments reduce the liability. There is an exception for short-term leases (12 months or less) and leases of low-value assets: for those, you may expense the payments as incurred instead of recognizing a right-of-use asset and lease liability. This is why most leases are shown on the balance sheet, with exemptions only for those specific short-term or low-value cases.