BLM17030 - IFRS 16 accounting: Background to lease accounting

IFRS 16 has a single lessee accounting model that requires assets and liabilities arising from all but exempt lease agreements to be recognised on the balance sheet. The lessee will recognise an asset reflecting their right to use the leased asset for the lease term and a lease liability reflecting their obligation to make lease payments. Both the right-of-use asset and lease liability will be recognised at the commencement of the lease.

The right-of-use asset is depreciated, normally on a straight line basis, over the lease term. The interest on the lease liability is recognised so as to maintain a constant rate on the outstanding lease liability. Depreciation and interest on the lease liability are both recognised in the profit and loss account.