How Leased Assets and Lease Liabilities Are Presented on the Balance Sheet

Leased assets and lease liabilities arise when a company obtains the right to use an asset under a lease agreement for a specified period. With the introduction of IFRS 16 and ASC 842, almost all leases are recognized on the balance sheet, ending the distinction between on-balance-sheet and off-balance-sheet operating leases. This approach provides a more complete picture of a company’s financial position by recognizing both the right-of-use (ROU) asset and the corresponding lease liability.

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How lease accounting works under IFRS 16 and ASC 842

Under the new lease standards, lessees must record a right-of-use asset and a lease liability at the commencement date, except for short-term leases (less than 12 months) and low-value assets (e.g., small office equipment).

• Right-of-Use Asset (ROU): Represents the lessee’s right to use the underlying asset during the lease term.

• Lease Liability: Represents the obligation to make future lease payments, discounted to present value.

Example:A company signs a five-year warehouse lease requiring annual payments of 100,000 and a discount rate of 6 percent. The present value of lease payments (421,000) is recognized as both an asset and a liability.

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Presentation on the balance sheet

Both IFRS 16 and ASC 842 require separate or clearly identifiable presentation of lease-related balances:

Balance Sheet Section	Account	Example Amount (USD)
Non-Current Assets	Right-of-Use Asset – Buildings	421,000
Current Liabilities	Lease Liability – Current Portion	85,000
Non-Current Liabilities	Lease Liability – Non-Current	336,000

The ROU asset may be presented within the same line item as owned assets (e.g., property, plant, and equipment), while the liability is split between current and non-current portions.

Under IFRS, subleases and variable lease components are disclosed separately. Under US GAAP, presentation is similar but classification between operating and finance leases remains relevant for the income statement.

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Journal entries for leases

At lease commencement:

• Debit: Right-of-Use Asset 421,000

• Credit: Lease Liability 421,000

To record periodic lease payments:

• Debit: Lease Liability 100,000

• Debit: Interest Expense 25,000

• Credit: Cash 125,000

To record amortization of ROU asset:

• Debit: Amortization Expense 84,200

• Credit: Accumulated Amortization – ROU Asset 84,200

The total expense pattern differs depending on lease classification: finance leases yield higher front-loaded expenses, while operating leases under US GAAP produce straight-line expense recognition.

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Standards under IFRS and US GAAP

• IFRS (IFRS 16 – Leases):

  • All leases are on the balance sheet (no operating vs. finance classification for lessees).

  • Lease liability measured at present value of lease payments.

  • ROU asset includes initial direct costs and restoration obligations.

  • Depreciation and interest are recognized separately in profit or loss.

• US GAAP (ASC 842 – Leases):

  • Similar recognition model, but retains two types of leases for lessees: finance leases and operating leases.

  • Both recognize assets and liabilities, but income statement patterns differ.

Both standards aim for transparency and comparability, though IFRS applies a single lessee model, while US GAAP maintains dual classification.

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Impact on financial performance and ratios

The shift to on-balance-sheet lease accounting increases both assets and liabilities, affecting leverage, liquidity, and profitability ratios.

For example:

• Debt-to-Equity Ratio: Increases due to higher liabilities.

• Return on Assets (ROA): Decreases as total assets rise.

• EBITDA: Increases because lease expenses are replaced by depreciation and interest, which are excluded from EBITDA.

Example:Before IFRS 16 adoption, lease expenses of 100,000 reduced operating income. After adoption, depreciation (84,200) and interest (25,000) are recognized separately—raising EBITDA but leaving net income nearly unchanged.

Analysts adjust these ratios to compare companies consistently, especially across sectors like retail, airlines, and logistics where lease intensity is high.

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Disclosures required for leases

Entities must disclose:

• A maturity analysis of lease liabilities.

• Expense breakdown (depreciation, interest, short-term leases, variable payments).

• Additions to ROU assets during the period.

• Weighted-average lease term and discount rate.

• Cash outflows related to leases.

These disclosures ensure stakeholders understand both the quantitative and qualitative aspects of lease obligations and usage.

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Operational considerations

Lease capitalization has reshaped how companies approach financing, performance measurement, and asset management. It promotes transparency by revealing the full scope of contractual commitments that were previously off-balance-sheet.

For management, careful classification, discount rate determination, and reassessment of lease modifications are essential. For investors, analyzing lease-related liabilities provides deeper insight into long-term financial commitments, operational flexibility, and risk exposure.

Transparent reporting of leased assets and liabilities aligns accounting presentation with economic reality—demonstrating how the company finances, uses, and controls productive assets over time.

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