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

1. 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.

2. 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).

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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.

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Technical Analysis Steps

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

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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.

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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.

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References

• IBR Determination: Building incremental borrowing rates defensibly.

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Assets

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

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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.