Navigating the complex landscape of lease accounting requires a deep understanding of its unique terminology. At Rubli, we’ve gathered key terms and concepts to help you navigate lease liabilities, right-of-use assets, and more.
If you’re looking for a tool that will help you streamline the process of achieving accurate and compliant accounting under this standard, we encourage you to learn more about our lease accounting software and book a demo today.
A - D
Assessed termination date
The date in which a lessee expects to terminate the lease, based on clauses in the contract and accounting judgement they have applied, which may differ from the contractual end date.
Commencement date
The date when the asset is made available to the lessee.
Contractual termination date
The date specified in the lease agreement when the lessee’s right to use the underlying asset ends.
Depreciation
A reduction in the value of an asset over time, reflecting its usage. Depreciation helps allocate the cost of an asset over its useful life.
E - H
Economical life
The period in which a leased asset is expected to be economically usable.
Fair value
The price that would be received for an asset in an arm’s length transaction between market participants.
Finance lease
A lease that transfers substantially all risks/rewards to the lessee.
Fixed payments
This refers to the payments made by a lessee to a lessor that are fixed in amount, or determinable with certainty, and do not vary based on future performance or usage.
Foreign currency
Any currency relevant to the entity’s transactions, reporting or lease agreements. To learn more read our blog on Forex and IFRS 16 Lease Accounting.
Lease currency
The currency in which lease payments are made.
Functional Currency
The main currency a business uses for its day-to-day operations and financial reporting.
Presentation Currency
The currency in which an entity presents its financial statements. Also called, Reporting Currency.
I - L
Impairment
A loss in the value of a leased asset or a lessor’s net investment in a lease, resulting from a lessee’s inability to pay, or a decline in the asset’s economic benefit.
Impairment reversal
A reversal of previously recognised impairment loss when the circumstances causing the impairment no longer exist or have improved.
Inception date
The date the parties contractually commit to the lease terms.
Initial Direct costs
The costs incurred by the lessor or lessee in setting up the lease.
Interest expense
The cost of borrowing to acquire the leased asset.
Interest rate implicit in the lease
This is the interest rate that is implied in the contract, calculated based on the lease payments and the fair value of the asset. Usually, only the lessor has sufficient detail to calculate this rate.
Lease
A contract that gives the right to use an asset for a period of time in exchange for payment.
Lease accounting
Accounting for leases by a party involved in the leasing asset.
Lease component
A part of a lease that the lessee can benefit from separately and is not highly dependent on the other underlying asset component, like in a lease for office space and parking.
Lease Incentive
This is a payment received from a lessor, or a reduction in lease payments, to ensure that the lessee enters into a contract.
Lease liability
The balance recognised at the present value of the lessee’s obligation to make lease payments.
Lease modification
Any subsequent changes to the original lease agreement.
Lease payments
The payments made by the lessee.
Lease term
The period for which the lessee has the right to use an underlying asset.
Lessee
The entity that gains the right to use an asset for a period of time.
Lessee Incremental Borrowing rate (IBR)
This is the interest rate a lessee would pay to borrow funds over a similar period to purchase the leased asset.
Lessor
A leased asset that is of low value when it is new, regardless of the age.
M - P
Operating lease
The Landlord does not transfer all the risks or rewards to the lessee.
Option to extend
A party’s option to extend the period of a lease within the current contract.
Option to renew
This refers to a party’s option to extend the lease term beyond the initial period with a new contract.
Option to terminate
This refers to a party’s right to end the lease agreement before the contractual termination date, usually with notice or penalty.
Purchase option
The right to purchase the leased asset at the end of the lease term.
R - U
Remeasurement
This is an adjustment of the value of a lease liability and right-of-use (ROU) asset, when there are changes in the lease agreement, accounting judgements or lease payments.
Residual value
The asset’s value at the end of the lease.
Restoration costs
The lessee’s provision for the obligation to restore the leased asset to its original condition or remove any leasehold improvements at the end of the lease. (Dismantling costs, dilapidation costs, removal costs).
Right-of-use asset
An asset that a lessee has the right to use for a specific period, as agreed in a lease.
Sale-and-leaseback
When an entity sells an asset and then leases the same asset back, both the seller-lessee and buyer-lessor will recognise a sale-and-leaseback transaction .
Short term lease
A lease with a period of less than 12 months.
Sub-lease
A transaction where a lessee rents out the leased asset to another party.
Underlying Asset
The asset that a lessor provides the right to use to a lessee through a lease.
Unguaranteed residual value
The portion of the residual value of the leased asset that is not guaranteed by the lessee but it is an important consideration for the lessor.
Unearned finance lease income
The difference between the total lease payments receivable by a lessor and the net investment in the lease, as a result of the discounting impact.
Useful life
The period the asset is expected to be used by the company.
V - Z
Variable lease payments
Payments that vary based on factors like usage or performance.
Final thoughts on Lease Accounting Terminology
Understanding the terminology of lease accounting is crucial for effective financial management and compliance with IFRS 16. You will be better equipped to navigate through your way in lease accounting, ensuring accuracy.
We also offer additional lease accounting resources and helpful considerations for selecting the right IFRS 16 software in our lease accounting training hub.
Looking to streamline accounting and reporting under this standard? Our cloud-based lease accounting software is exactly what you need! We’ve helped companies around the world achieve accurate and compliant lease accounting under accounting standards, including IFRS 16, ASC 842 and FRS 102. Book a demo to find out more.
