A lease under IFRS 16 is a contract that grants the right to use an asset for a specified period in exchange for consideration. It must provide:
- Control over the asset's economic benefits.
- The right to dictate the asset's use.
Under IFRS 16, lessees no longer differentiate between operating and finance leases. Instead, all leases are treated as finance leases. This means:
- Capitalization: Leases are recorded on the balance sheet as a Right of Use (ROU) asset and a corresponding lease liability.
- Expense Recognition: The income statement recognizes both the depreciation of the ROU asset and the interest on the lease liability.
Step 1: Recognize the Lease Liability and Right-of-Use Asset
At the start of a lease, record the lease liability and right-of-use (ROU) asset as follows.
Create General Ledger (GL) accounts
Select the Right-of-Use GL in the GL account credit section, and set the dimension to the item used previously.
Right of Use (ROU) asset under Non-current assets 
Create an Inventory Item
Set up an inventory item and select the "Right to Use" GL account from the Edit GL Accounts option.
Create invoice received document
Step 2: Recognize the Unwinding of the Lease Liability and Amortization of the Right-of-Use Asset
For each reporting period, you need to record the following:
1. Payments Made
Recognize any lease payments made during the period, which will reduce the lease liability. Create a cash/Bank payment document with transaction type Others.
In the Bank payment tab, choose Current finance lease liability GL, and choose the company and contract. Review the document and post the transaction.
The below entry will be created
Dr Current finance lease liabilities
Cr Bank accounts
2. Amortization of the Right-of-Use Asset
Record the monthly amortization expense for the right-of-use asset, which decreases its value over time. Use the Other Expense document in Accounting for this manual entry each month.
Create a new document, then select the accrual option in the main tab and choose the appropriate entity.
In the expense tab, select the GL Depreciation Expense. In the Account Dr dimension, choose the expense item and select the fixed asset in the fixed asset column (ensure a new one is created if needed).
Select the Right-of-Use GL in the GL account credit section, and set the dimension to the item which was used previously.
The entry will be Dr Depreciation of Fixed assets
Cr Right to use
2. Interest Accrued
Calculate and recognize the interest expense on the lease liability. This amount reflects the cost of borrowing for the remaining liability.
To document interest, utilize the Other Expense document. First, set up the necessary GL account for Interest Cost under Other Operating Expenses. For Interest Liability, you can select the existing Current Interest Payable or create a new GL account as needed.
After the GL account is established, create a new Other Expense document with the appropriate entry.
Step 6
For rent payments (COS) on the lease, create new GL accounts for Rent Payment under the appropriate category. Next, generate an Other Expense document—record the debit as Rent Payment COS and the credit as Lease Liability.
Step 3: Continue to Record Journal Entries Until Lease Expiry
Continue posting journal entries at your reporting frequency until the lease ends, provided there are no modifications.
Key Points
- Record Entries: Include lease payments, interest, and amortization.
- Result: Both the lease liability and right-of-use asset will be reduced to zero by the lease expiry.