Capitalization Model
1. Initial Measurement Mechanics
Lessees must bring substantially all leases onto the balance sheet. At the commencement date, a lessee recognizes a Lease Liability and a corresponding Right-of-Use (ROU) Asset.
  • Lease Liability: Measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee uses its incremental borrowing rate (IBR).
  • ROU Asset Formula:

Initial ROU Asset = Initial Lease Liability + Lease Payments Made at/before Comm. + Initial Direct Costs − Lease Incentives Received + Estimated Restoration/Dismantling Costs
2. Scope Exemptions and Practical Expedients
Both frameworks provide relief to avoid capitalising low-impact arrangements, though with structural differences:
  • Short-Term Leases (Shared): Lessees can elect not to apply the capitalization model to leases that have a lease term of 12 months or less at the commencement date, provided they do not include a purchase option that the lessee is reasonably certain to exercise. These payments are expensed linearly over the term.
  • Low-Value Assets (IFRS Only): IFRS 16 permits an additional exemption for leases where the underlying asset is of low value when new (typically asset values under $5,000, such as personal computers, office furniture, or telephones). US GAAP has no low-value exemption threshold; all long-term leases must be capitalized regardless of individual asset size.

 
PreviousNext