Leases (IFRS 16, ASC 842)

A company that leases its office, its cars or its machines as a lessee recognises under IFRS 16 and under US GAAP (ASC 842) a right-of-use asset and a lease liability at the commencement date, then books interest on the liability and depreciation of the asset each period (a US GAAP operating lease: one straight-line lease cost instead). The lessor's bills are the payments: they reduce the liability. The design is ADR-0072; the controls are in the control matrix (section "Leases", LS1 to LS8).

Everything is a REST operation first (tag "fixed assets" in the generated reference); the screens are Leases under Assets & tax in the menu, the lease card, and the agents' MCP tools list_leases, get_lease and the step leases of run_period_end.

Local GAAP. Under the Swiss Code of Obligations, HGB, the French PCG, the Italian OIC and the Spanish PGC a lessee usually expenses its lease payments as rent and recognises nothing. A company whose framework is local keeps its statutory books here and enters no lease: POST /v1/leases answers 422 lease_local_framework ("a company that keeps its books under local rules expenses its leases; set the framework to IFRS or US GAAP to recognise them"), and New lease says so. A subsidiary that reports to its group under IFRS (framework ifrs) on a local chart adds the lease accounts to its chart (POST /v1/entities/{entity}/accounts with the roles below) and enters its leases; the lease screens remind it that its local rules usually expense them.

US GAAP: finance or operating. A lease of a company whose framework is us_gaap is classified (classification, Classification on New lease): operating (the default) or finance (ASC 842-10-25-2). Under IFRS every lease is finance (IFRS 16 has one model for a lessee); operating is refused with 422 lease_operating_ifrs.

Accounts

An operating lease's asset and liability are kept apart from a finance lease's (ASC 842-20-45-1): on the US chart the finance leases are on 1720, 1729 and 2750, the operating leases on 1730, 1739 and 2760. A lease names its accounts, or takes the company's account with each role. The asset and its accumulated depreciation are two accounts. A lease in a foreign currency needs a liability account without a fixed currency (or one fixed to the lease currency).

Entering a lease

POST /v1/leases (New lease on the Leases screen): code (your contract number, or left out for the company's next number, L-00001), name, lessor (a vendor, optional), currency (default the functional one), commencement date, term in months (a multiple of the payment interval), payment, frequency (monthly, quarterly, yearly), timing (advance or arrears), the effective annual discount rate in percent (the rate implicit in the lease, else the incremental borrowing rate), initial direct costs and payments made before commencement (both added to the asset, in the lease currency), the classification (US GAAP) and the accounts: interest and depreciation for a finance lease, the lease cost account for an operating lease. The answer has the whole schedule. The lease is a draft.

An exempt lease (exemption: short_term for 12 months or less, low_value, IFRS 16.5) is only listed, with status exempt: no accounts, no entries; book its bills as an expense.

The schedule

Lease months run from the commencement date: from 1 August, month 1 is 1 to 31 August; from 31 January, month 1 ends on 27 February, because month 2 starts on 28 February (a short month takes its last day); a payment in arrears then falls on the 27th, not at the month end.

• The rate is an effective annual rate. A month's rate is its twelfth root: (1 + 5 %) ^ (1/12) − 1 = 0.40741 %, so twelve months compound to exactly 5 %. Yearly payments are discounted exactly as an annual annuity: 12,000 a year in arrears for five years at 5 % is 12,000 × (1 − 1.05⁻⁵) / 0.05 = 51,953.72. The arithmetic runs at 34 digits; only the amounts booked are rounded to the cent.
• The liability at commencement is the present value of the payments at the monthly rate. 36 payments of 1,000 in arrears at 5 %: 1,000 × (1 − 1.05⁻³) / 0.0040741 = 33,421.27; in advance: 33,557.43 (the first payment is not discounted).
• Each month: in advance the payment reduces the liability before the interest, in arrears after it; the interest is the liability times the monthly rate, rounded to the cent (33,421.27 × 0.40741 % = 136.16). The rounding of all months is absorbed by the last month that bears interest, so the liability ends at exactly zero, and the interest of the lease is the payments less the liability at commencement (36,000 − 33,421.27 = 2,578.73).
• The asset is depreciated straight line over the term: the carrying amount left over the months left, rounded; the last month takes the rest (928.37 a month, the last 928.32).
• Current and non-current. The lease card splits the liability at its date: non-current is the principal still owed twelve months later; the rest is current, which includes the interest accrued at the date that the next payment settles. Six months into the yearly lease above, the liability is 53,236.72: current 10,685.32 (1,283.00 accrued interest and 9,402.32 principal repaid by the payment at month 12), non-current 42,551.40.

Activation

POST /v1/leases/{lease}/activate (Activate on the card) books the commencement entry dated the commencement date, through the approval policy: Dr right-of-use asset (functional currency, at the commencement date's rate) / Cr lease liability (lease currency), and the initial direct costs and prepaid payments from credit_account (where they were booked, e.g. prepayments) into the asset. The lease is pending while the entry waits for approval, active once posted, a draft again when it is rejected.

Post lease entries

POST /v1/periods/{period_id}/leases (Post lease entries on the Leases screen, the period chosen there) books, for every active lease, the interest and depreciation of the lease months that ended by the period's end and are not booked yet, in one entry dated at the period's end, source fa, through the approval policy:

An operating lease books both lines to its lease_cost account (see below).

The first period. A lease that commences mid-month has no lease month ended at the end of its first period. The run books the part of month 1 that ran by then, by days (stub in the summary): from 15 December, 17/31 of month 1's interest and depreciation in December, so the year bears them; January's run books the rest of month 1.

A change of payments waiting for approval holds the lease: the run skips it (listed in skipped; 409 lease_change_pending when nothing else is due) and the close checklist warns (leases_change_pending), because the months would be booked from the new payments and a rejection voids the change. Decide the change, then post the lease entries.

A lease is booked once per period (the database refuses a second row for the same lease and period); running the period again books only leases activated since, else 409 lease_nothing_due. A rejected entry is made again by the next run. The close checklist warns (leases_posted) while an active lease has months to the period's end that are not booked; it does not block the close: the next period's run books them.

Operating leases (US GAAP)

An operating lease (ASC 842) is recognised like any lease: the activation books the right-of-use asset and the liability, and the liability accrues interest at the rate. Its expense is one straight-line lease cost a month: the total payments plus the initial direct costs and the payments made before commencement, spread evenly over the term. The asset's reduction is the plug: the lease cost less the month's interest accretion. Both are booked to the lease cost account (6110):

1,000 a month in arrears for 36 months at 5 % with 360 of initial direct costs: the lease cost is (36 × 1,000 + 360) / 36 = 1,010 a month; in month 1 the interest is 136.16 and the asset's reduction 873.84. Over the term the lease cost is 36,360, the payments plus the initial direct costs, and the asset and the liability both end at zero. The schedule on the lease card shows the lease cost of each month. A change of payments spreads the cost left over the months left.

The lessor's bill

Book the lessor's bill like any vendor bill, its line on the lease liability account (2750, of an operating lease on the US chart 2760): the payment reduces the liability, and the bank payment settles the bill as usual. The liability is not a control account for exactly this reason. VAT on the bill (a car lease) is input VAT as usual; only the net payment is the lease payment. The payment the schedule expects and the bill's net amount should agree; a difference stays on the liability account until it is corrected.

Foreign currency

A lease in another currency than the functional one (an office in Basel rented in EUR by a company in CHF) books its liability lines in the lease currency. At each period end the FX revaluation remeasures the lease liability accounts' balance in each foreign currency at the closing rate (position provider lease_liabilities), and the revaluation is due while such a lease is active. The right-of-use asset is a non-monetary item and stays at the rate of the commencement date. Bills in EUR on the liability account reduce the EUR balance.

Cash flow statement

The cash flow statement shows leases as IAS 7 and ASC 842 do. The commencement, a change of payments and an early end move no cash: their asset and liability amounts are left out of investing and financing (IAS 7.43), and a gain or loss on ending a lease is taken back out of the profit on the line for other non-cash items. The lessor's bills are the cash, counted when they are paid; unpaid, a bill shows nothing. Under IFRS and for a US GAAP finance lease each payment first pays the interest accrued on the liability and not yet paid, which is operating (the choice of IAS 7.33 the statement makes) and in the interest-paid note, and the rest is principal, a financing outflow (IFRS 16.50, ASC 842-20-45-5). The interest that accrues and is not yet paid is on the non-cash line (on de_hgb, whose interest is financing, it stays off the financing interest line until paid). The first payment of a lease paid in advance is therefore all principal, and each month's interest is paid with the next payment. The FX revaluation of a lease liability, or of an unpaid bill, in another currency is no cash flow either; the exchange difference realised when a foreign-currency bill is paid stays in operating activities, and financing shows the bill at its booked amount.

All of an operating lease's cash flows are operating activities (ASC 842-20-45-5(c)). Its asset and liability are placed by their roles (operating_lease_right_of_use, operating_lease_accumulated_amortization, operating_lease_liability), whatever their account number; an account a company adds for an operating lease without these roles follows its number (on the US chart a 27xx account is a borrowing, in financing). A company set up on the US chart before these accounts existed has 1730, 1739 and 2760 added. A US operating lease entered before keeps its accounts 1720, 1729 and 2750 and still shows in financing; to show it in operating activities, end it and enter it again, which books it on the new accounts.

The group cash flow statement does the same with its members' leases, at the average rate of the year.

Changes and the end

Change of payments POST /v1/leases/{lease}/changes (effective date, new payment, reason; Change payments on the card): from the first day of a lease month that no run booked yet, the liability becomes the present value of the remaining payments at the original rate; the asset changes by the same amount (at that day's rate), and its new carrying amount is depreciated over the months left. One entry through the approval policy; a rejection voids the change. A decrease larger than the asset left is refused (end the lease instead).

Early termination POST /v1/leases/{lease}/terminate (last day, optional gain or loss account; End lease on the card): on the last day of a lease month whose entries are booked (and none after it), with no change of payments waiting for approval (409 lease_change_pending), the liability left and the asset (cost and accumulated depreciation) are derecognised; the difference is a gain or a loss (the roles asset_disposal_gain and asset_disposal_loss unless an account is named). A lease that ran its full term is ended the same way, with nothing left. The lease is terminated once the entry is posted.

Demo

Demo AG (CH01, framework IFRS on the Swiss KMU chart) rents its Basel office in EUR (L-BSL-01, EUR 3,500 a month in advance for five years at 3.5 %: a liability of EUR 193,208.42), with lease accounts 1580, 1589, 2420 and 6910 added to its chart; Demo GmbH (DE01, IFRS) leases a company car in EUR (L-CAR-01, 450 a month in advance for three years at 5 %); Demo Inc. (US01, US GAAP) rents its Austin warehouse as an operating lease (L-AUS-01, USD 6,000 a month in advance for five years at 6 %). All three commence on 1 August 2026 and are booked for August before the August close.

Not built

Lease incentives (IFRS 16.24(b)) and restoration costs (IFRS 16.24(d)) in the initial measurement, depreciation over the useful life when ownership transfers or a purchase option is reasonably certain (IFRS 16.32), lessor accounting, subleases, variable payments other than a change of payments, reassessing the term or a purchase option, reclassifying a US GAAP lease, editing a draft, and running Post lease entries from the close automation's job.