IFRS 16 Leases moved almost every lease onto the balance sheet. For a lessee that means one number drives everything else: the lease liability. Get it right and the right-of-use asset, the interest charge, the depreciation and the disclosure note all follow. Get it wrong and every figure built on it is wrong too.
This guide shows exactly how to calculate a lease liability under IFRS 16, step by step, using a worked example you can check in Excel. It then builds the right-of-use asset, the full amortisation schedule, the journal entries and the current/non-current split, and shows how the answer changes when payments are made in advance or increase each year.
Quick answer: The IFRS 16 lease liability is the present value of the lease payments not yet paid at the commencement date, discounted at the interest rate implicit in the lease or, if that cannot be readily determined, the lessee’s incremental borrowing rate (IFRS 16, paragraph 26).
Want the answer in seconds? Use the free IFRS 16 Lease Calculator, then come back here to understand every line.
What goes into the lease liability
Before you discount anything, you need the right list of payments. IFRS 16 paragraph 27 says the lease payments included in the liability are:
- Fixed payments, including “in-substance fixed” payments, less any lease incentives receivable.
- Variable payments that depend on an index or a rate (for example CPI-linked rent), measured using the index or rate at the commencement date.
- Amounts expected to be payable under residual value guarantees.
- The exercise price of a purchase option you are reasonably certain to exercise.
- Termination penalties, if the lease term reflects you exercising a termination option.
Just as important is what stays out:
- Variable payments linked to sales or usage (for example turnover rent or a per-kilometre charge). These go straight to profit or loss when incurred.
- Non-lease components such as service charges, maintenance or cleaning, unless you elect the practical expedient to combine them with the lease (paragraph 15).
- VAT and other recoverable taxes.
The five steps to calculate the lease liability
Step 1: Fix the lease term
The lease term is the non-cancellable period plus any extension periods you are reasonably certain to exercise, plus any periods covered by a termination option you are reasonably certain not to exercise. A five-year office lease with a five-year renewal option you will almost certainly use is a ten-year lease for IFRS 16. This judgement often moves the liability more than any other input.
Step 2: List every payment and its date
Write out each payment, when it falls due, and whether it is paid at the start of each period (in advance) or at the end (in arrears). Apply any fixed escalations. If a payment is linked to CPI, use the index as it stands at commencement; do not forecast future inflation.
Step 3: Choose the discount rate
Use the rate implicit in the lease if you can determine it. In practice most lessees cannot, because they do not know the lessor’s residual value or initial direct costs, so they use their incremental borrowing rate (IBR): the rate they would pay to borrow, over a similar term and with similar security, the funds needed for an asset of similar value in a similar economic environment. This is the single biggest judgement in the calculation, so we cover it in detail in How to Determine the Incremental Borrowing Rate Under IFRS 16.
Step 4: Discount each payment to the commencement date
Each payment is discounted with the standard present value formula:
PV = Payment ÷ (1 + r)t
where r is the discount rate per period and t is the number of periods from commencement to the payment date. The lease liability is the sum of those present values for every payment not yet made.
Step 5: Build the right-of-use asset from the liability
Paragraph 24 sets out the cost of the right-of-use asset:
| Lease liability at commencement | X |
| Add: lease payments made at or before commencement | X |
| Less: lease incentives received | (X) |
| Add: initial direct costs (for example legal and agent fees) | X |
| Add: estimated cost of dismantling or restoring the site (present value) | X |
| Right-of-use asset | X |
|---|
Worked example: a five-year office lease
A company leases office space from 1 January 2026. The facts:
| Input | Value |
|---|---|
| Lease term | 5 years, no options |
| Annual payment | US$12,000 |
| Payment timing | In arrears (31 December each year) |
| Discount rate (incremental borrowing rate) | 10% per year |
| Initial direct costs (legal fees) | US$1,000 |
| Incentives, restoration costs | None |
Calculating the lease liability
| Payment date | Payment | Discount factor at 10% | Present value |
|---|---|---|---|
| 31 Dec 2026 | 12,000 | 0.909091 | 10,909.09 |
| 31 Dec 2027 | 12,000 | 0.826446 | 9,917.36 |
| 31 Dec 2028 | 12,000 | 0.751315 | 9,015.78 |
| 31 Dec 2029 | 12,000 | 0.683013 | 8,196.16 |
| 31 Dec 2030 | 12,000 | 0.620921 | 7,451.06 |
| Total | 60,000 | 45,489.44 |
The rounded present values add to 45,489.45; the unrounded total is 45,489.44.
The lease liability at 1 January 2026 is US$45,489.44. In Excel you get the same answer in one cell:
=PV(10%, 5, -12000) → 45,489.44
Calculating the right-of-use asset
| Lease liability | 45,489.44 |
| Add: initial direct costs | 1,000.00 |
| Right-of-use asset at commencement | 46,489.44 |
|---|
The asset is depreciated on a straight-line basis over the five-year lease term: 46,489.44 ÷ 5 = US$9,297.89 a year. (Paragraph 32 uses the shorter of the lease term and the asset’s useful life, unless ownership transfers or a purchase option is reasonably certain.)
The lease liability amortisation schedule
Each year, interest is charged on the opening liability at 10% (the effective interest method), and the payment reduces it.
| Year | Opening liability | Interest at 10% | Payment | Closing liability |
|---|---|---|---|---|
| 2026 | 45,489.44 | 4,548.94 | (12,000.00) | 38,038.38 |
| 2027 | 38,038.38 | 3,803.84 | (12,000.00) | 29,842.22 |
| 2028 | 29,842.22 | 2,984.22 | (12,000.00) | 20,826.44 |
| 2029 | 20,826.44 | 2,082.64 | (12,000.00) | 10,909.08 |
| 2030 | 10,909.08 | 1,090.92 | (12,000.00) | 0.00 |
| Total | 14,510.56 | (60,000.00) |
Figures rounded to the cent each year; the final year’s interest absorbs one cent of rounding.
The charge to profit or loss each year
| Year | Depreciation | Interest | Total IFRS 16 charge | Cash rent paid |
|---|---|---|---|---|
| 2026 | 9,297.89 | 4,548.94 | 13,846.83 | 12,000.00 |
| 2027 | 9,297.89 | 3,803.84 | 13,101.73 | 12,000.00 |
| 2028 | 9,297.89 | 2,984.22 | 12,282.11 | 12,000.00 |
| 2029 | 9,297.89 | 2,082.64 | 11,380.53 | 12,000.00 |
| 2030 | 9,297.88 | 1,090.92 | 10,388.80 | 12,000.00 |
| Total | 46,489.44 | 14,510.56 | 61,000.00 | 60,000.00 |
Two things to notice. First, the expense is front-loaded: higher than the cash rent in the early years and lower later, because interest is charged on a liability that is largest at the start. Second, the total charge over the lease (61,000) equals the rent (60,000) plus the initial direct costs (1,000). IFRS 16 changes the timing and classification of the cost, not the total.
This front-loading matters for budgets and covenants. EBITDA rises under IFRS 16 (the rent no longer sits in operating costs), while net debt rises by the full lease liability. Lenders and analysts who compare ratios across years need to know which basis they are looking at.
Journal entries
1 January 2026 — commencement
| Account | Debit | Credit |
|---|---|---|
| Right-of-use asset | 46,489.44 | |
| Lease liability | 45,489.44 | |
| Cash (legal fees paid) | 1,000.00 |
31 December 2026 — year-end entries
| Account | Debit | Credit |
|---|---|---|
| Interest expense | 4,548.94 | |
| Lease liability | 4,548.94 | |
| Lease liability | 12,000.00 | |
| Cash | 12,000.00 | |
| Depreciation expense | 9,297.89 | |
| Accumulated depreciation — right-of-use asset | 9,297.89 |
In the cash flow statement, the principal part of the payment (12,000 − 4,548.94 = 7,451.06) is a financing outflow. The interest part follows your IAS 7 policy for interest paid, usually operating or financing.
Current and non-current split at the year-end
At 31 December 2026 the liability is 38,038.38. The current portion is the amount by which the liability will fall in the next 12 months: next year’s payment of 12,000 less next year’s interest of 3,803.84.
| Current lease liability (due within 12 months) | 8,196.16 |
| Non-current lease liability | 29,842.22 |
| Total lease liability at 31 December 2026 | 38,038.38 |
|---|
A common error is to show the whole 12,000 payment as current. That overstates current liabilities, because 3,803.84 of next year’s payment is interest that has not yet accrued.
Variation 1: payments in advance
Change one fact: the 12,000 is paid on 1 January each year instead of 31 December. Every payment is now discounted for one period less, so the present value of the five payments rises to 50,038.39. In Excel, set the type argument to 1:
=PV(10%, 5, -12000, 0, 1) → 50,038.39
Be careful with presentation. The first payment is made on the commencement date, so strictly it is a payment made at commencement, not part of the liability. The figures become:
| Lease liability (PV of the four remaining payments) | 38,038.39 |
| Add: payment made at commencement | 12,000.00 |
| Add: initial direct costs | 1,000.00 |
| Right-of-use asset | 51,038.39 |
|---|
Some calculators report the 50,038.39 gross figure as the liability “before the day-one payment”. Both views reach the same right-of-use asset; just make sure the balance you book on day one reflects the cash that has already left the bank. Total interest over the lease falls to 9,961.61 (against 14,510.56 in arrears) because the debt is repaid sooner.
Variation 2: payments that increase each year
Many property leases have fixed annual escalations. Suppose the 12,000 increases by 5% at each anniversary, still paid in arrears at 10%:
| Year | 2026 | 2027 | 2028 | 2029 | 2030 |
|---|---|---|---|---|---|
| Payment | 12,000.00 | 12,600.00 | 13,230.00 | 13,891.50 | 14,586.08 |
The lease liability rises to 49,807.10. Because the payments are no longer equal, Excel’s PV function cannot be used. Put the five payments in cells B2:B6 and use =NPV(10%, B2:B6), which assumes each cash flow falls at the end of its period. For payments in advance, add the first payment separately and discount only the rest.
If the escalation is linked to CPI rather than fixed, you would measure the liability using today’s index (no forecast), then remeasure it each time the index changes the cash payments.
Common mistakes that auditors find
- Using the contract period instead of the lease term. Renewal options that are reasonably certain must be included.
- Mixing annual rates with monthly payments. For monthly payments, convert the annual rate to a monthly rate and count the number of months, not years.
- Including service charges in the payments. Unless you elected to combine components, separate them out.
- Picking a discount rate without support. A rate copied from last year’s bank loan, with no adjustment for term or security, rarely survives audit.
- Forgetting initial direct costs and restoration costs in the right-of-use asset.
- Showing the whole next payment as current. Only the principal portion is current.
- Not tracking modifications. A rent reduction, extension or change in scope usually means remeasuring the liability with a revised discount rate.
When you can leave a lease off the balance sheet
IFRS 16 offers two optional recognition exemptions (paragraphs 5 to 8):
- Short-term leases of 12 months or less at commencement, with no purchase option. The election is made by class of underlying asset.
- Leases of low-value assets, such as laptops, phones and small office furniture. The IASB’s Basis for Conclusions refers to assets worth around US$5,000 or less when new. This election can be made lease by lease.
For these, the payments are simply expensed, usually on a straight-line basis.
IFRS 16 vs US GAAP (ASC 842)
The liability is measured in a very similar way under ASC 842: the present value of lease payments at the implicit rate or the incremental borrowing rate. The big difference is the income statement. US GAAP keeps two classes for lessees: finance leases (front-loaded interest plus amortisation, like IFRS 16) and operating leases, which show a single straight-line lease cost. US private companies can also elect to use a risk-free rate by class of asset. IFRS 16 has no such option: every capitalised lease follows the single model shown above.
Do it in seconds, then check it
Building the schedule by hand is the best way to understand IFRS 16. For real leases, it is slow and easy to get wrong.
Free IFRS 16 tools from EunoiaData
The IFRS 16 Lease Calculator works out the lease liability, right-of-use asset and first-year charge for a single lease, with payments in advance or arrears, annual escalations, initial direct costs, incentives and restoration costs. It also checks the short-term and low-value exemptions.
Got more than one lease? The IFRS 16 Lease Portfolio takes up to 100 leases from a free Excel register and gives you year-end figures by asset class. See how to set up your lease register.
Frequently asked questions
How do you calculate the lease liability under IFRS 16?
List the lease payments not yet paid at the commencement date, discount each one to the commencement date at the interest rate implicit in the lease (or your incremental borrowing rate if the implicit rate cannot be readily determined), and add up the present values. The total is the lease liability.
What is the formula for the right-of-use asset?
Right-of-use asset = lease liability + lease payments made at or before commencement − lease incentives received + initial direct costs + estimated restoration costs.
How do I calculate an IFRS 16 lease liability in Excel?
For equal payments use =PV(rate, number of periods, -payment), adding ,0,1 at the end for payments in advance. For unequal or escalating payments, list them in a column and use =NPV(rate, range). Match the rate to the payment frequency: a monthly lease needs a monthly rate.
Why is the IFRS 16 expense higher than the rent in the early years?
Depreciation is straight-line, but interest is charged on the outstanding liability, which is largest at the start of the lease. The total cost over the lease is the same as the rent (plus any initial direct costs), but more of it falls in the early years.
How is the current portion of a lease liability calculated?
The current portion is the reduction in the liability over the next 12 months: the payments due in that period less the interest that will accrue on the liability in that period.
Is VAT included in the IFRS 16 lease liability?
Recoverable VAT is not part of the lease payments, so it is excluded. Irrecoverable VAT is a judgement area; many entities treat it as a cost of the lease, so check your policy with your auditor.
This article explains the general requirements of IFRS 16 for lessees and uses simplified examples. It is not accounting advice for any specific lease. For help applying IFRS 16 to your leases, talk to our team.