Finance lease
A finance lease shifts essentially all the economic exposure of owning an asset onto the lessee, who records a right-of-use asset and a lease liability at the present value of future payments.
FrameworkIFRS 16
See it move
A five-year lease at €20,000 a year, discounted at 6%, has a present value of €84,250. On day one, the lessee recognises a right-of-use asset of €84,250 and a matching lease liability of €84,250, bringing the arrangement onto the balance sheet just as a purchase would, rather than treating the payments as a simple rental expense.
The formula
Variables
- Lease payment due at end of period t (€)
- Discount rate — rate implicit in the lease or lessee's incremental borrowing rate (decimal)
- Total number of payment periods (periods)
- Period index (period)
Initial lease liability recognised at the commencement date, equal to the present value of future lease payments discounted at the rate implicit in the lease or the lessee's incremental borrowing rate.
Check yourself
Kestrel SA signs a five-year lease for computer servers. The present value of the future lease payments is €240,000. Under IFRS 16, which of the following journal entries is correct at the commencement date?