1. Lease Recognition (At Commencement)
Template
Cr Lease Liability [amount]
Worked Example
Scenario: 1 Jan 2026, Company leases equipment. ROU asset = £421,240. Lease liability = £421,240.
Cr Lease Liability — Equipment 421,240
2. Annual Depreciation of ROU Asset
Template
Cr Accumulated Depreciation — ROU Asset [annual amount]
Calculation
Depreciation = ROU Asset ÷ Lease Term (in years)
Depreciate on a straight-line basis over the lease term (not the asset's useful life, unless the asset transfers to you at the end).
Worked Example
Lease term: 5 years. ROU asset: £421,240. Annual depreciation: £421,240 ÷ 5 = £84,248
Cr Accumulated Depreciation — ROU Asset 84,248
3. Annual Interest Expense on Lease Liability
Template
Cr Lease Liability [amount]
Calculation
Interest Expense = Opening Lease Liability × IBR
Worked Example
Opening liability: £421,240. IBR: 6%. Interest: £421,240 × 6% = £25,274
Cr Lease Liability 25,274
4. Lease Payment (Principal + Interest)
Template
Dr Interest Expense (if not yet accrued) [interest]
Cr Cash [total payment]
Worked Example
Annual payment: £100,000. Interest (as above): £25,274. Principal: £100,000 −’ £25,274 = £74,726
Dr Interest Expense 25,274
Cr Cash 100,000
5. Variable Lease Payments
Template
Variable payments (e.g., rent indexed to RPI, usage-based charges) are expensed as incurred, not part of the lease liability.
Cr Cash/Payable [amount]
6. Lease Modification (Increase in Scope)
Template
Date of Modification
Dr ROU Asset [increase in liability]
Cr Lease Liability [increase in liability]
7. Early Lease Termination
Template
Cr Lease Liability [increase in liability]
When you exit a lease early, remove the remaining ROU asset and lease liability. Any difference is a gain or loss.
Dr Accumulated Depreciation — ROU Asset [depreciation to date]
Dr (Cr) Gain (Loss) on Lease Termination [net gain/loss]
Cr ROU Asset [gross amount]
Cr Cash/Payable [termination fee/cash]
Quick Reference: IFRS 16 Journal Entry Summary
| Event | Debit | Credit | Timing |
|---|---|---|---|
| Lease commencement | ROU Asset | Lease Liability | Day 1 |
| Annual depreciation | Depreciation Expense | Accumulated Depreciation | Year-end |
| Annual interest | Interest Expense | Lease Liability | Year-end (accrual) |
| Lease payment | Lease Liability; Interest Expense | Cash | Payment date |
| Variable payment | Variable Lease Expense | Cash | When incurred |
| Lease modification (increase) | ROU Asset | Lease Liability | Modification date |
| Early termination | Lease Liability; Accumulated Depreciation; Gain/Loss | ROU Asset; Cash | Termination date |
Real-Life Case Study: The Journals for a New Warehouse Lease
Scenario. A distributor leases a warehouse for 6 years, £80,000 annually in arrears, IBR 5%. PV of payments = £406,076.
Day-1 journal. Dr Right-of-use asset £406,076 / Cr Lease liability £406,076.
End of year 1.
- Dr Interest expense £20,304 (£406,076 × 5%) / Cr Lease liability.
- Dr Lease liability £59,696 / Cr Cash £80,000 (payment split).
- Dr Depreciation £67,679 (£406,076 ÷ 6) / Cr Accumulated depreciation.
Takeaway. Watch the payment split: the whole £80k leaves cash, but only the capital portion (£59,696) touches the liability, the rest is interest. Booking the full payment against the liability is the single most common IFRS 16 posting error.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
• IFRS 16 Discount Rate (IBR): Complete Guide to Incremental Borrowing Rate Calculation
• IFRS 16 Lease Modifications: Every Scenario Explained with Journal Entries
• IFRS 16 Sale and Leaseback: Accounting Treatment & Journal Entries Explained
• IFRS 16 Short-Term & Low-Value Leases: Recognition Exemptions Explained with Examples