Lease Accounting Memo Template (IFRS 16, ASC 842)

Lease Accounting Memo: [Arrangement name]

Technical accounting memo for one lease or one lease portfolio, from the lessee's side: arrangement summary, whether the contract contains a lease, components, lease term, payments and discount rate, classification, initial and subsequent measurement, remeasurement, exemptions, sale and leaseback, journal entries and disclosure. Structure aligned with IFRS 16 Leases (effective for annual periods beginning on or after 2019-01-01) and FASB ASC Topic 842, cited by standard and paragraph number only. Obtain the standard for the normative text. Replace every [bracketed] value and every row marked Example. This is a document format, not accounting, audit, tax, legal or financial advice.

Document control

Approvals

Revision history

Contents

1. Summary and conclusion
2. Arrangement facts and documents reviewed
3. Does the contract contain a lease
4. Lease and non-lease components
5. Lease term
6. Lease payments and discount rate
7. Initial measurement
8. Subsequent measurement
9. Reassessment, remeasurement and modifications
10. Exemptions and practical expedients
11. Sale and leaseback and subleases
12. US GAAP classification and comparison
13. Journal entries, presentation and disclosure
14. Controls and monitoring
15. Glossary and references
16. Standard and licence note

1. Summary and conclusion

Lead with the numbers a reviewer needs and the judgement that could change them. If the lease term or the discount rate were close calls, show the effect of the alternative so the approver can see what is at stake.

Example: The Leipzig warehouse contract contains a lease of an identified building. The lease term is the 8-year non-cancellable period from 2027-01-01; the 4-year extension option is not reasonably certain to be exercised. Annual rent of EUR 480,000 is payable on 1 January each year and is indexed to the German consumer price index every two years. Using an incremental borrowing rate of 5.0%, the opening lease liability is EUR 2,777,459 (seven remaining payments) and the right-of-use asset is EUR 3,351,871 after the first payment, initial direct costs, the restoration estimate and the landlord incentive. FY2027 profit or loss under IFRS 16 shows depreciation of EUR 418,984 and lease interest of EUR 138,873. The service charge of EUR 40,000 per year is a non-lease component and is expensed. Extending the term to 12 years would raise the opening liability by about EUR 1.2 million (section 5).

2. Arrangement facts and documents reviewed

Read the signed lease and every amendment, side letter and handover protocol. Ask the real estate team whether the lessor made any commitments outside the lease, such as rent-free periods, fit-out contributions or rights to substitute space. Record when the lessor made the asset available for use, because commencement is that date, not the date of signature or the date of the first payment.

2.1 Documents reviewed

2.2 Key terms

3. Does the contract contain a lease

Assess whether there is an identified asset and whether the customer has the right to obtain substantially all the economic benefits from its use and to direct its use throughout the period of use (IFRS 16 paragraphs 9 to 11 and B9 to B31; ASC 842-10-15-3 to 15-16). Record the evidence for each element. Substitution rights matter only when the supplier has both the practical ability and an economic benefit to substitute; a contractual right that will never be used does not defeat an identified asset.

Use the same analysis for service contracts that may contain embedded leases. Logistics, colocation, cloud capacity and outsourced manufacturing contracts are common sources. Keep a register of contracts assessed and the result, because auditors test completeness of the lease population.

4. Lease and non-lease components

Identify each separate lease component and each non-lease component (IFRS 16 paragraphs 12 to 17; ASC 842-10-15-28 to 15-42). Allocate the consideration on relative stand-alone prices, or apply the lessee practical expedient to account for each lease component and its associated non-lease components as a single lease component for a class of underlying asset (IFRS 16 paragraph 15; ASC 842-10-15-37). Record the election by asset class in the accounting policy and apply it consistently.

Payments that do not transfer a good or service to the lessee, such as property tax and insurance of the lessor, are not components; they are part of the consideration when fixed and are variable payments when they depend on actual cost.

Example check: the contract states rent and service charge separately, and Corvid's procurement team confirmed that the service charge is in line with the price of comparable stand-alone facility management contracts in the region. No reallocation is therefore needed.

5. Lease term

Start from the non-cancellable period, then assess each option against the economic factors in IFRS 16 paragraphs B37 to B40 (ASC 842-10-55-26): contractual terms for the option period compared with market rates, significant leasehold improvements, costs of terminating or relocating, the importance of the asset to operations and past practice. Assess at commencement and reassess only on a significant event or change in circumstances within the lessee's control (IFRS 16 paragraph 20; ASC 842-10-35-1).

Example sensitivity: if the 4-year option were included, four more annual payments of EUR 480,000 due at the start of years 9 to 12 would add their present value at 5.0%, EUR 1,209,620 (rounded), to the opening lease liability. Show this figure to the approver because the judgement is significant and the auditor will ask for it.

6. Lease payments and discount rate

Include in the liability the payments listed in IFRS 16 paragraph 27 (ASC 842-10-30-5): fixed payments less incentives receivable, variable payments based on an index or rate measured at the commencement-date index, amounts expected under residual value guarantees, and option or penalty payments when reasonably certain. Exclude variable payments linked to usage or performance.

Use the interest rate implicit in the lease when it can be readily determined; otherwise use the lessee's incremental borrowing rate (IFRS 16 paragraph 26; ASC 842-20-30-3, which also allows non-public business entities a risk-free rate election by asset class). Document the build of the incremental rate: a reference rate for the currency and term, the lessee's credit spread, and adjustments for security and the nature of the asset. Both IFRS 16 and ASC 842 define the rate on a borrowing with similar security (collateralised under ASC 842), so the security adjustment normally reduces the spread compared with senior unsecured debt. Any positive adjustment needs its own reason, such as an asset-specific or size premium, and must be shown separately.

The present value of a payment stream in advance is:

With P = EUR 480,000, r = 5.0% and n = 8, the present value of all eight payments is EUR 3,257,459. The first payment is made at commencement, so it enters the right-of-use asset directly and the lease liability is the present value of the remaining seven payments, EUR 2,777,459.

7. Initial measurement

Measure the lease liability at the present value of unpaid lease payments (IFRS 16 paragraph 26; ASC 842-20-30-1). Measure the right-of-use asset at the liability plus payments made at or before commencement, less incentives received, plus initial direct costs and an estimate of dismantling and restoration costs (IFRS 16 paragraphs 23 and 24; ASC 842-20-30-5, with restoration handled under ASC 410 in US GAAP). Recognise the restoration obligation as a provision under IAS 37 at its present value using the provision discount rate, which is different from the lease rate.

Example check: 2,777,459 + 480,000 + 36,000 + 118,411 - 60,000 = 3,351,870, shown as EUR 3,351,871 because each line is rounded from an unrounded calculation. Use the unrounded figure in the sub-ledger.

8. Subsequent measurement

Measure the liability at amortised cost using the effective interest method (IFRS 16 paragraph 36; ASC 842-20-35-1 and 35-4 for finance leases). Depreciate the right-of-use asset from commencement to the earlier of the end of its useful life and the end of the lease term, unless ownership transfers or a purchase option is reasonably certain (IFRS 16 paragraphs 31 and 32). Test it for impairment under IAS 36 (IFRS 16 paragraph 33). Unwind the restoration provision as a finance cost.

The liability at each year end, before the payment due the next day, is:

8.1 Lease liability schedule (base case, before indexation)

Example check: total payments of EUR 3,840,000 (8 x 480,000) equal the present value of EUR 3,257,459 plus total interest of EUR 582,541. The last payment, on 2034-01-01, settles the liability, and the lease ends on 2034-12-31.

8.2 Right-of-use asset and profit or loss

Depreciation is EUR 3,351,871 / 8 = EUR 418,984 per year (final year adjusted by EUR 1 for rounding). The total expense is front-loaded because interest falls as the liability is repaid. Under IFRS 18, which applies from 2027-01-01, depreciation sits in the operating category and lease interest in the financing category; check the group mapping in IFRS 18 Transition Plan (finance/ifrs-18-transition-plan).

9. Reassessment, remeasurement and modifications

Remeasure the liability when the lease term changes, when the assessment of a purchase option changes, when expected residual value guarantee payments change, or when future payments change because of an index or rate (IFRS 16 paragraphs 39 to 43). Under ASC 842 the remeasurement triggers are narrower (ASC 842-10-35-4 and 35-5): a change in an index or rate alone does not lead to remeasurement, and the higher payments are variable lease cost when incurred unless the liability is remeasured for another reason (section 12). Under IFRS 16, use a revised discount rate for term and purchase-option changes, and the unchanged rate for index changes, except where a floating interest rate drives the change. Adjust the right-of-use asset for the remeasurement, and take any amount below zero to profit or loss.

Account for a modification as a separate lease only when it adds a right to use another asset at a price commensurate with its stand-alone price (IFRS 16 paragraphs 44 to 46; ASC 842-10-25-8 to 25-18). Other modifications are remeasured at the effective date with a revised rate.

Example remeasurement RMS-001: from 2029-01-01 the annual payment rises from EUR 480,000 to EUR 508,800 (480,000 x 1.06) for the six remaining payments due 2029 to 2034. On 2029-01-01, immediately before that payment, the liability on the old payments is EUR 2,558,149. The present value of six payments of EUR 508,800 in advance at the unchanged 5.0% is EUR 2,711,638. The increase of EUR 153,489 is debited to the right-of-use asset. The asset carrying amount at that date was EUR 2,513,903 (3,351,871 less two years of depreciation of 418,984), so the adjusted amount of EUR 2,667,392 is depreciated over the remaining six years at EUR 444,565 per year.

10. Exemptions and practical expedients

Record the elections the group has made in its accounting policy and confirm they apply to this arrangement. Elections apply by class of underlying asset (short-term leases) or lease by lease (low-value assets under IFRS 16). Keep the list of leases expensed under the exemptions, with their annual cost, because the disclosure needs the expense amount.

11. Sale and leaseback and subleases

For a sale and leaseback, first decide whether the transfer is a sale under IFRS 15 (IFRS 16 paragraphs 98 to 103; ASC 842-40-25-1 to 25-3). If it is a sale, measure the right-of-use asset at the retained proportion of the previous carrying amount and recognise only the gain relating to the rights transferred. The amendment Lease Liability in a Sale and Leaseback (issued 2022, effective for periods beginning on or after 2024-01-01) governs subsequent measurement when payments are variable. If it is not a sale, account for the proceeds as a financial liability.

For a sublease, the intermediate lessor classifies the sublease by reference to the right-of-use asset of the head lease under IFRS 16 paragraph B58, and by reference to the underlying asset under ASC 842-10-25-6.

Example: Not applicable. Corvid did not own the warehouse and does not sublet any part of it.

12. US GAAP classification and comparison

Under ASC 842 a lessee classifies each lease as finance or operating using the criteria in ASC 842-10-25-2: transfer of ownership, a purchase option reasonably certain to be exercised, a term for the major part of the remaining economic life, a present value of payments amounting to substantially all of the fair value, and a specialised asset. ASC 842-10-55-2 permits a common approach that reads "major part" as 75% or more and "substantially all" as 90% or more; record the thresholds in the group policy if used.

For an operating lease, ASC 842 presents a single straight-line lease cost (ASC 842-20-25-6). The liability is measured the same way as under IFRS 16, but the right-of-use asset excludes the restoration cost, which is an asset retirement cost under ASC 410.

Example check: the straight-line cost is total payments of EUR 3,840,000 plus initial direct costs of EUR 36,000 less the incentive of EUR 60,000, divided by 8 years: EUR 3,816,000 / 8 = EUR 477,000. The ASC 842 asset is 2,777,459 + 480,000 + 36,000 - 60,000 = EUR 3,233,459.

13. Journal entries, presentation and disclosure

Record the commencement entries in the lease sub-ledger and post summary entries to the general ledger each month. Split the liability between current and non-current at each reporting date: the current portion is the principal falling due within twelve months. Map the lease to the disclosure requirements in IFRS 16 paragraphs 47 to 60 and ASC 842-20-45 and 842-20-50, including the maturity analysis of lease liabilities required under IFRS 7.

Example check: the undiscounted payments remaining at 2027-12-31 are the seven payments due 2028 to 2034, EUR 3,360,000, split as one within a year, four in years two to five and two after five years.

14. Controls and monitoring

Lease accounting fails most often through incomplete populations and stale inputs rather than wrong formulas. Assign owners for contract intake, the discount rate table, option reassessments and index updates, and record the evidence each control produces. Reconcile the lease sub-ledger to the general ledger monthly and to the fixed asset register quarterly. Link these controls to the Risk and Control Matrix (compliance/risk-control-matrix).

15. Glossary and references

15.1 Glossary

15.2 References

Standard and licence note

Structure aligned with the lessee model of IFRS 16 Leases and FASB ASC Topic 842 Leases. Standards are cited by name and paragraph number only; no text, definitions or illustrative examples from the IFRS Foundation or FASB are reproduced or paraphrased, and IFRS is a trademark of the IFRS Foundation used nominatively. Obtain the current standards for the normative requirements and check later amendments and effective dates. Corvid Commerce Group, Brightmoor Logistics Properties and every figure are fictional and original. This template is original text written for this collection and is not accounting advice. Template licence: MIT.