Accounting for Leases in Interim Financial Reporting – Quarterly Considerations under ASC 842 and IFRS 16

In interim financial statements, entities must account for leases in a way that reflects year-to-date activity as of the end of the reporting period. Under both U.S. GAAP (ASC 270 and ASC 842) and IFRS (IAS 34 and IFRS 16), lease accounting principles remain the same, but there are important nuances related to timing, estimates, remeasurements, and disclosures.

This article explains how to account for leases in quarterly (interim) reports, including treatment of lease expense, remeasurements, and modifications, with practical examples and references to required disclosures.

1. Consistency of Lease Accounting Between Interim and Annual Reporting

Both ASC 842 and IFRS 16 require that lease accounting during interim periods be consistent with annual reporting policies.

✦ Leases are not reclassified or reassessed just because the report is interim

✦ ROU assets and lease liabilities continue to be recognized and updated as needed

Key principle: Entities apply the same recognition and measurement rules, using the year-to-date basis, not just the quarter’s activity.

2. Lease Expense Recognition – Quarterly Reporting

Operating Leases (Lessee):

✦ Total lease expense is allocated evenly over the lease term

✦ Each interim period reflects a straight-line allocation of total annual expense

Example: ✦ Annual lease expense = $120,000✦ Recognize $30,000 per quarter

Journal entry (quarterly):Dr. Lease Expense – $30,000 / Cr. Lease Liability and/or Cash – $30,000.

Finance Leases (Lessee):

✦ Interest and amortization are separately recognized using the effective interest method

✦ Quarterly amounts vary based on the lease amortization schedule

3. Remeasurements and Modifications in Interim Periods

Modifications or remeasurements must be reflected in the quarter they occur:

✦ Exercise of renewal/termination option

✦ Lease modification (e.g., rent change or change in leased area)

✦ Index-based rent adjustments (e.g., CPI increases)

Example: In Q2, a CPI adjustment increases lease payments. The lease liability must be remeasured, and the ROU asset adjusted accordingly:

Dr. ROU Asset – $8,000 / Cr. Lease Liability – $8,000.

These changes are not smoothed across the year—adjustments are made in the quarter of occurrence.

4. Impairments and Early Terminations

If impairment indicators or early lease terminations arise during a quarter:

✦ Impairment of ROU assets must be tested and recognized immediately

✦ Gains or losses from partial or full termination are recognized in that period

✦ Revisions to depreciation/amortization schedules must begin in the same quarter

Dr. Impairment Loss – $15,000 / Cr. ROU Asset – $15,000.

5. Disclosures in Interim Reports

Under ASC 270 and IAS 34, interim lease disclosures are condensed but must include:

✦ Material changes in lease terms or scope

✦ New leases entered into during the period

✦ Modifications and remeasurements

✦ Impairment losses or termination effects

✦ Total lease expense recognized to date

Disclosure example: “During Q2, the Company entered into a new 10-year lease for manufacturing space, resulting in a $4.2 million increase in ROU assets and lease liabilities. An additional $125,000 of lease expense was recognized during the quarter.”

6. Practical Considerations

✦ Use month-to-date and quarter-to-date schedules for lease amortization

✦ Carefully monitor lease indexation clauses for trigger-based reassessment

✦ Coordinate accounting entries with treasury or accounts payable for lease cash flow tracking