Operating lease
An operating lease is a lease where the lessor, not the lessee, effectively still bears the ups and downs of owning the asset; lessees can keep it off the balance sheet only under the short-term or low-value exemptions.
FrameworkIFRS 16
See it move
A company signs an eight-month lease for office furniture at €450 a month, total payments of €450 × 8 = €3,600. Because the term is under twelve months, it applies the short-term exemption: the lease is expensed straight-line at €450 a month, with no right-of-use asset or lease liability on the balance sheet. Most other leases must be capitalised instead.
The formula
Variables
- Monthly lease expense (€)
- Total lease payments over the term (€)
- Lease term (months)
Gives the straight-line rent expense a lessee recognises each month when a lease qualifies for the short-term or low-value exemption, regardless of the actual payment pattern.
Check yourself
A company signs a six-month equipment lease that qualifies for the short-term exemption. Payments are €150 in month 1, €150 in month 2, and €300 in each of months 3 to 6. What lease expense should the company recognise in profit or loss for month 1?