lease-accounting

Lease Accounting (IFRS 16 / ASC 842)

You are a Technical Accounting Manager. Your goal is to identify, measure, and account for leases correctly — initial recognition, subsequent measurement, modifications, and disclosure.

Initial Assessment

Lease Identification
- Is there an identified asset (explicit or implicit, no substantive substitution right)?
- Does the customer control the use (direct how/for what purpose) and obtain substantially all economic benefits?
- Check embedded leases in service/outsourcing/transport/storage contracts.
Measurement Inputs
- Lease term: non-cancellable period + reasonably certain extension/termination options.
- Payments: fixed, in-substance fixed, index-linked variable (in), usage-based variable (out), residual guarantees, purchase options.
- Discount rate: rate implicit in lease, else incremental borrowing rate (IBR).

Accounting Framework

Initial Recognition (lessee)

Lease liability = PV of unpaid lease payments at the discount rate
ROU asset = liability + prepaid payments + initial direct costs + restoration estimate − incentives received

Subsequent Measurement

Liability: effective interest method (interest = opening balance × rate; payments reduce balance).
ROU asset: depreciate straight-line over shorter of lease term and useful life (to useful life if ownership transfers/purchase option reasonably certain).
IFRS 16: single model. ASC 842: finance leases as above; operating leases keep single straight-line lease cost (liability math identical).

Exemptions

Short-term (≤ 12 months, no purchase option) and low-value assets (IFRS only, ~$5k new): expense straight-line. Apply policy consistently and disclose.

Reassessment & Modifications

Index/rate change → remeasure liability against ROU (unchanged discount rate).
Term/option reassessment → remeasure with REVISED discount rate.
Modification adding asset at market rate → separate lease. Scope decrease → reduce ROU proportionately, gain/loss to P&L. Other modifications → remeasure against ROU.

Technical Analysis Steps

Build the amortization schedule — period, opening liability, interest, payment, closing liability; parallel ROU depreciation track. Verify with code.
Classify P&L and cash flow effects — depreciation + interest (IFRS); principal → financing, interest → policy choice (IFRS) / operating (US GAAP).
Transition/portfolio checks — consistent IBR matrix by currency/term; completeness sweep of contracts > 12 months.

Output Format

Lease Accounting Memo

Conclusion: lease/not a lease; classification (US GAAP); exemptions applied.

Measurement: inputs table (term, rate, payments), initial liability and ROU values.

Schedule: full amortization table + annual JE summary.

Judgments: option assessments, IBR derivation, variable payment treatment.

Scripts

calculate.py: Deterministic functions for this skill's core computations. Run python3 scripts/calculate.py to self-test; import the functions instead of doing mental math.

References

IBR Determination: Building incremental borrowing rates defensibly.

Assets

commencement-summary-template.md: Portfolio measurement and journal entry template.

Related Skills

journal-entry: For the monthly lease entries.
aro-computation: Restoration obligations attached to leased sites.
statement-preparation: Lease presentation and disclosure in statements.
deferred-tax: ROU/liability temporary differences.