Explain how a lessee accounts for an office lease under IFRS 16 / Ind AS 116, from day one to the end of the lease.

What the interviewer wants to hear

• Recognises a right-of-use asset and a lease liability at commencement
• Lease liability is the present value of lease payments
• Interest on the liability using the effective interest method
• Depreciates the right-of-use asset, usually straight-line
• Short-term and low-value exemptions
• Front-loaded expense compared with straight-line rent

Model answer

At commencement the lessee recognises a lease liability at the present value of unpaid lease payments, discounted at the rate implicit in the lease or, more often, its incremental borrowing rate. The right-of-use asset starts at the same amount plus any initial direct costs, prepaid rent and restoration costs, less incentives received. Each period, interest is charged on the opening liability and the payment reduces it, so the liability unwinds like a loan. The right-of-use asset is depreciated, normally straight-line over the lease term. In profit and loss you therefore see depreciation and interest instead of rent, and total expense is higher in early years because interest is higher then. The liability is split into current and non-current. Leases of 12 months or less and low-value assets can be expensed straight-line instead. Changes in term or payments trigger a remeasurement.

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