Enter the rent, the lease term and your incremental borrowing rate. The calculator shows the lease liability and the right-of-use asset at commencement and, year by year, how interest, depreciation and remeasurement for indexation affect the balance sheet and the income statement.
Lease liability at commencement
5,475,087
The right-of-use asset starts at the same amount.
Expense in year 1
1,284,168
Interest 189,151 + depreciation 1,095,017, against rent of 1,200,000.
Total interest expense
524,913
Over the whole lease term.
| Year | Rent | Interest | Depreciation | Remeasurement | Liability at year end | Right-of-use asset at year end |
|---|---|---|---|---|---|---|
| 1 | 1,200,000 | 189,151 | 1,095,017 | – | 4,464,237 | 4,380,069 |
| 2 | 1,200,000 | 148,717 | 1,095,017 | – | 3,412,954 | 3,285,052 |
| 3 | 1,200,000 | 106,665 | 1,095,017 | – | 2,319,619 | 2,190,035 |
| 4 | 1,200,000 | 62,932 | 1,095,017 | – | 1,182,551 | 1,095,017 |
| 5 | 1,200,000 | 17,449 | 1,095,017 | – | 0 | 0 |
Under IFRS 16 the lessee recognises almost all leases on the balance sheet. The exceptions are short-term leases of twelve months or less and leases of low-value assets, and premises are never a low-value asset. Two items arise at commencement: a lease liability, which is the present value of the lease payments, and a right-of-use asset of the same amount before incentives and initial direct costs.
An example: the annual rent is 1,200,000, paid quarterly in advance, the lease term is 5 years and the incremental borrowing rate is 4%. The lease liability at commencement is then 5,475,087. In year 1 the interest expense is 189,151 and depreciation 1,095,017, so 1,284,168 in the income statement against 1,200,000 in rent. In the final year the expense is 1,112,466. Over the whole lease the total equals the rent paid, 6,000,000.
That is why IFRS 16 affects key ratios: EBITDA rises when rent is replaced by depreciation and interest, while net debt increases by the lease liability.
Read more in our article IFRS 16 in practice: five areas to check, on the discount rate, indexation, options, incentives and variable payments.
Entities that prepare their financial statements under IFRS, which in practice mainly means listed groups in their consolidated accounts. The rules for individual legal entities often differ; in Sweden, for example, a legal entity applying RFR 2 may choose not to apply IFRS 16 and expense the rent on a straight-line basis instead.
The interest rate implicit in the lease, if it can be readily determined. For property leases it almost never can, so the lessee uses its incremental borrowing rate: the rate it would pay to borrow a similar amount, over a similar term and with similar security. The rate is set at commencement and does not change when the rent is indexed.
At commencement the liability is based on the rent in force at that date, without forecasting future index changes (IFRS 16.27(b)). When an index adjustment changes the payments, the liability is remeasured using the original discount rate and the right-of-use asset is adjusted by the same amount (IFRS 16.42(b) and 16.43).
It is included if the lessee is reasonably certain to extend. Leases that renew automatically unless notice is given call for that assessment, for example after major investments in the premises. The assessment is revisited when a significant event within the lessee’s control occurs.
VAT is not. Charges on top of the base rent are assessed separately: service components such as heating can be kept out of the liability if they are separated (IFRS 16.12), and variable payments that do not depend on an index or a rate are not included at all but expensed as they arise.
Interest is charged on the liability, which is largest at the start, while depreciation is straight-line. Together they give an expense that is higher than the rent in the early years and lower in the later ones, although the total over the lease equals the rent paid.
This page is for information only and is not accounting advice. Agree judgements and calculations for your leases with your auditor.