Lesson 2 of 8 · All lessons in this module
- What a lease is and how it is classifiedVideo lesson
- Lessee accounting: the IFRS model and US GAAP finance leasesVideo lesson
- US GAAP operating leases and the effect on ratiosVideo lesson
- Lessor accounting: finance versus operating leases
- Defined contribution and defined benefit pension plansVideo lesson
- Share-based compensation: stock grants, options and SARsVideo lesson
- Presentation and disclosure: leases, pensions and share-based pay
- Integrated cases: reading the pension, lease and share-based pay notes
Lesson 2 of 8 · 14 min
Lessee accounting: the IFRS model and US GAAP finance leases
Under IFRS (all leases) and US GAAP (finance leases), the lessee books a right-of-use asset and a lease liability at the PV of the payments, then charges interest on the liability and amortises the asset separately.
In short
- At inception: right-of-use (ROU) asset = lease liability = PV of lease payments, discounted at the rate implicit in the lease or the lessee's estimated secured borrowing rate.
- Each payment splits into interest (opening liability × rate) and principal repayment (payment − interest).
- The ROU asset is amortised, often straight line over the lease term, so asset and liability drift apart after day one.
- Income statement: interest expense and amortisation expense shown separately; total expense is front-loaded.
- Cash flows: principal in financing; interest in operating or financing depending on the lessee's policy.
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