Lease Disclosures in the Financial Statements – Requirements for Lessees and Lessors

Comprehensive lease disclosures provide transparency into an entity’s leasing activities, obligations, and financial impacts. Both U.S. GAAP (ASC 842) and IFRS (IFRS 16) require lessees and lessors to disclose qualitative and quantitative information that enables users to assess the amount, timing, and uncertainty of cash flows arising from leases.

This article outlines the key disclosure requirements for lessees and lessors, including tables, narrative explanations, and practical presentation examples.

1. Disclosure Objectives

The overarching objective is to give financial statement users a clear view of:

✦ The nature of lease arrangements

✦ Future cash flow obligations

✦ The impact of leases on the financial position and performance

✦ Significant judgments and assumptions used in lease accounting

Disclosures must be presented separately for finance leases and operating leases.

2. Lessee Disclosures (ASC 842 and IFRS 16)

Quantitative Disclosures:

✦ Lease liabilities: current and noncurrent portions

✦ ROU assets: broken down by asset class (e.g., buildings, equipment)

✦ Lease expense:➝ Operating lease expense➝ Finance lease amortization and interest

✦ Cash paid for leases (operating and financing)

✦ Weighted-average lease term and discount rate

✦ Maturity analysis of lease liabilities by year

Example table – Maturity analysis of lease liabilities:

Year	Lease Payments
Year 1	$120,000
Year 2	$115,000
Year 3	$110,000
Year 4	$105,000
Year 5+	$300,000
Total	$750,000

Undiscounted future lease payments with reconciliation to lease liabilities

Qualitative Disclosures:

✦ Description of lease arrangements

✦ Basis for classifying leases

✦ Significant judgments (e.g., lease term assumptions, discount rate)

✦ Information on extension, termination, or purchase options

3. Lessor Disclosures

Lessors must disclose separately for:

✦ Operating leases

✦ Finance leases

Operating Lease Disclosures:

✦ Lease income recognized

✦ Maturity analysis of future lease payments

✦ Description of leased assets and significant terms

✦ Residual value risk exposure

Finance Lease Disclosures:

✦ Lease receivables, unearned interest income, and net investment in leases

✦ Reconciliation of gross investment to present value

✦ Income recognized from finance leases

✦ Description of lease terms and any contingent rentals

4. IFRS-Specific Requirements

IFRS 16 requires additional disclosures for lessees:

✦ Interest expense on lease liabilities

✦ Variable lease payments not included in lease liabilities

✦ Gains/losses from lease modifications or terminations

✦ Short-term and low-value lease expense (optional exemptions)

✦ Lease commitments not yet commenced

5. Presentation Format Tips

✦ Use tables to summarize lease amounts and liabilities

✦ Break down lease disclosures by lease type and asset class

✦ Present narrative disclosures clearly, describing assumptions and risks

✦ Align footnotes with balance sheet and income statement figures for traceability

6. Sample Narrative Disclosure

“The Company leases real estate and equipment under non-cancelable agreements ranging from 1 to 10 years. Lease liabilities are discounted using the Company’s incremental borrowing rate, with a weighted average rate of 4.2% and a weighted average remaining term of 5.6 years. As of December 31, right-of-use assets totaled $1.3 million and lease liabilities totaled $1.35 million.”