IFRS 16 lessee accounting step by step

This is the calculation behind every IFRS 16 lease. Once you can build the liability schedule and post the entries for one lease, every other lease is a variation. This guide works one office lease from the first day to the last.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

A lessee measures the lease liability at the present value of the lease payments not yet paid, discounted at the rate implicit in the lease or, if that cannot be determined, its incremental borrowing rate. The right-of-use asset starts at the same amount, adjusted for payments made at or before commencement, initial direct costs and incentives. Each year, the liability accrues interest and falls with each payment, and the asset is depreciated. For a five-year lease of CU 100,000 a year at 5%, both start at CU 432,948.

At a glance

Liability
Present value of unpaid payments
Discount rate
Implicit rate or incremental borrowing rate
Asset
Liability plus adjustments
Each year
Interest, payment, depreciation
Example liability
CU 432,948
Excel
Lease calculator
IFRS 16 lessee accounting step by stepLiability: Present value of unpaid payments; Discount rate: Implicit rate or incremental borrowing rate; Asset: Liability plus adjustments; Each year: Interest, payment, depreciation; Example liability: CU 432,948; Excel: Lease calculator.KEY FACTS AT A GLANCEIFRS 16 lessee accounting step by stepLiabilityPresent value of unpaidpaymentsDiscount rateImplicit rate orincremental borrowingrateAssetLiability plusadjustmentsEach yearInterest, payment,depreciationExample liabilityCU 432,948ExcelLease calculatorChecked against official sourcesTax BakersIFRS 16 lessee accounting step by stepLiability: Present value of unpaid payments; Discount rate: Implicit rate or incremental borrowing rate; Asset: Liability plus adjustments; Each year: Interest, payment, depreciation; Example liability: CU 432,948; Excel: Lease calculator.KEY FACTS AT A GLANCEIFRS 16 lessee accounting step bystepLiabilityPresent value of unpaid paymentsDiscount rateImplicit rate or incremental borrowing rateAssetLiability plus adjustmentsEach yearInterest, payment, depreciationExample liabilityCU 432,948ExcelLease calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

The lease

A company leases an office for five years from 1 January 2026. It pays CU 100,000 at the end of each year. The rate implicit in the lease cannot be determined, so it uses its incremental borrowing rate of 5%. There are no initial direct costs, incentives or options.

Step 1: How is the lease liability measured?

At the present value of the payments not yet paid: CU 100,000 a year for five years at 5% = CU 432,947.67. Lease payments include fixed payments, variable payments that depend on an index or rate, amounts expected under residual value guarantees, and the exercise price of purchase options or termination penalties the lessee is reasonably certain to pay. Variable payments linked to sales or usage are excluded and expensed when incurred.

Step 2: How is the right-of-use asset measured?

At the lease liability, plus lease payments made at or before commencement, plus initial direct costs, plus an estimate of restoration costs, less lease incentives received. Here none of these apply, so the asset is also CU 432,947.67.

Step 3: Which entries are posted?

IFRS 16: the lessee's entries in year 1IFRS 16: the lessee's entries in year 11 January 2026: lease startsDebitCreditDr Right-of-use asset432,947.67Cr Lease liability432,947.6731 December 2026: paymentDebitCreditDr Interest expense21,647.38Dr Lease liability78,352.62Cr Cash100,000.0031 December 2026: depreciationDebitCreditDr Depreciation expense86,589.53Cr Accumulated depreciation86,589.53
Recognition on day one, then the first payment split into interest and principal, and a year of depreciation.

Step 4: How do the balances run off?

YearOpening liabilityInterest at 5%PaymentClosing liabilityDepreciationTotal expense
1432,94821,647100,000354,59586,590108,237
2354,59517,730100,000272,32586,590104,319
3272,32513,616100,000185,94186,590100,206
4185,9419,297100,00095,23886,59095,887
595,2384,762100,000086,59091,351

Interest falls as the liability is repaid, so the total expense is highest in year 1. Over the five years, total expense equals the CU 500,000 paid: CU 432,948 of depreciation plus CU 67,052 of interest.

Step 5: How is it presented?

  • Balance sheet: the right-of-use asset either as a separate line or within property, plant and equipment with disclosure; the lease liability separately or within borrowings, split between current and non-current.
  • Income statement: depreciation in operating expenses; interest in finance costs, which under IFRS 18 is the financing category.
  • Cash flow statement: principal payments in financing activities; interest paid in financing activities under IFRS 18.
  • Notes: see the IFRS 16 disclosure checklist.

What if the payments are made in advance?

If the same lease required CU 100,000 at the start of each year, the first payment is made at commencement and is not part of the liability. The liability is the present value of the four remaining payments, CU 354,595, and the right-of-use asset is that amount plus the CU 100,000 already paid: CU 454,595. The asset is larger than the liability from day one, and the interest charge in each year is lower because less is owed.

Can you check it with your own numbers?

The Lease calculator (Excel) builds this schedule for any lease of up to 20 years, with payments at the start or end of each year, initial direct costs and incentives, and produces the year 1 journal entries. It also shows the ASC 842 operating lease cost alongside.

Common mistakes

  • Discounting payments in arrears as if they were paid in advance, or the other way round.
  • Leaving variable payments linked to an index, such as inflation, out of the liability.
  • Depreciating the asset over its useful life when it should be the shorter of the lease term and useful life, unless ownership transfers.
  • Recording the whole payment as an expense.

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Questions people ask

How is the lease liability measured under IFRS 16?

At the present value of the lease payments not yet paid, discounted at the rate implicit in the lease or the lessee's incremental borrowing rate.

How is the right-of-use asset measured?

At the lease liability plus payments made at or before commencement, initial direct costs and restoration costs, less incentives received.

Over what period is the right-of-use asset depreciated?

Over the shorter of the lease term and the asset's useful life, unless ownership transfers or a purchase option is reasonably certain to be exercised.

Why is IFRS 16 expense higher in the early years?

Interest is charged on the outstanding liability, which is largest at the start.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 16 Leases

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 16IFRS 16 leases explainedIFRS 16Lease term, extension and termination options under IFRS 16Accounting standardsDebits and credits for standards students: the entries behind each standard

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This guide is general information. It is not tax or legal advice for your situation.