Accounting for Leases: Lessee Perspective
- Graziano Stefanelli
- Jul 4
- 3 min read
Lease accounting standards have undergone major revisions, fundamentally changing how companies recognize, measure, and disclose lease obligations. Under both US GAAP (ASC 842) and IFRS (IFRS 16), virtually all leases are now recognized on the balance sheet, reducing off-balance sheet financing and improving transparency. Understanding the new lessee model is critical for compliance, comparability, and decision-making.
Scope of Lease Accounting Standards
A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The lessee accounting model applies to nearly all leases, with limited exceptions for short-term leases (12 months or less) and low-value assets under IFRS.
Initial Recognition and Measurement
At the commencement date, lessees recognize:
A right-of-use (ROU) asset: Represents the lessee’s right to use the leased asset.
A lease liability: Represents the obligation to make future lease payments.
Measurement at inception:
Lease liability: Present value of future lease payments, discounted using the rate implicit in the lease (if known) or the lessee’s incremental borrowing rate.
ROU asset: Initially measured at the amount of the lease liability, plus any initial direct costs, prepaid lease payments, and less any lease incentives received.
Subsequent Measurement and Amortization
Lease liability: Increased by interest expense and decreased by lease payments.
ROU asset: Amortized (depreciated) over the shorter of the lease term or useful life.
Income Statement Impact: Each period, lessees recognize:
Interest expense on the lease liability (financing cost)
Amortization expense on the ROU asset (operating cost)
This “front-loads” total expense for finance leases but produces a straight-line total expense for operating leases under US GAAP, while IFRS 16 applies the same approach to all leases.
Lease Classification (US GAAP Only)
Under ASC 842, leases are classified as finance or operating based on specific criteria (transfer of ownership, bargain purchase option, lease term vs. asset life, PV of payments vs. asset value, and asset specialization). Both types appear on the balance sheet, but expense recognition patterns differ in the income statement.
Journal Entry Example: Lease Commencement
Assume a 5-year lease requiring annual payments of $20,000, with a 5% discount rate. The present value of payments is $86,000.
At lease inception:
Dr. Right-of-Use Asset ............. $86,000
Cr. Lease Liability .......................... $86,000
At first payment:
Dr. Lease Liability ......................... $20,000
Cr. Cash ........................................... $20,000
Each period:
Recognize interest expense on the liability
Recognize amortization expense on the ROU asset
Short-Term and Low-Value Leases
Short-term leases (12 months or less) and, under IFRS, leases of low-value assets (such as laptops or office furniture) may be accounted for off-balance sheet, with payments recognized as expense on a straight-line basis.
Disclosures and Presentation
Both ASC 842 and IFRS 16 require comprehensive disclosure of:
ROU assets and lease liabilities, separately from other assets and debt
Maturity analysis of lease payments
Variable lease payments, residual value guarantees, and options (renewal/termination)
Weighted-average lease terms and discount rates
Financial statement users can assess a company’s future cash outflows and flexibility related to leasing.
Relevant Accounting Standards
US GAAP: ASC 842 – Leases
IFRS: IFRS 16 – Leases
Both require extensive disclosures and, for lessees, the recognition of virtually all leases on the balance sheet.
Summary Table: Key Lessee Lease Accounting Elements
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