A lease is a contractual agreement in which a lessee (the user) obtains the right to use an asset from a lessor (the owner) for a specified period in exchange for periodic payments. Leases are common in real estate, equipment, and vehicle financing, and they play a significant role in both business operations and financial reporting.
Under accounting standards such as IFRS 16 and ASC 842, leases must be reported on the balance sheet. This means:
- The lessee must recognize a Lease Liability: the present value of future lease payments.
- A corresponding Right-of-Use Asset (ROA): representing the lessee’s right to use the leased asset over the term.
The Lease Liability is amortized using the effective interest method (based on the implicit or incremental borrowing rate), while the ROA is typically amortized on a straight-line basis over the lease term.
Properly accounting for leases ensures compliance with standards, improves transparency, and gives stakeholders a clear picture of a company’s financial commitments.