1. Amortization and Interest Schedules
- Finance Leases (IFRS & US GAAP): The lease liability is measured subsequently using the effective interest method. The ROU asset is depreciated straight-line over the shorter of the lease term or the useful life of the asset. This creates a front-loaded total expense pattern, as interest expenses are higher in the early years.
- Operating Leases (US GAAP Only): The lease liability is amortized using the effective interest method. However, the depreciation of the ROU asset is calculated as a variable balance, balancing the calculation so that the total periodic income statement cost (interest + depreciation) remains completely flat and straight-line across the entire lease lifecycle.
2. Triggering Remeasurements and Variable Adjustments
A lessee must recalculate its lease liability and adjust the ROU asset if there is a modification or a change in lease elements, such as:
- A change in the assessment of whether a purchase or extension option is reasonably certain to be exercised.
- A change in the estimated residual value guarantees expected to be payable.
- A adjustment to lease payments resulting from a shift in an index or variable market rate (e.g., consumer price index adjustments).
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