Quick answer
A lease provides the use of an asset for an agreed period in exchange for payment. Under IFRS 16, a lessee generally recognizes a right-of-use asset and a lease liability. Under ASPE Section 3065, a lessee instead classifies the arrangement as a capital or operating lease based on whether substantially all ownership benefits and risks transfer.
Economically, a lease can provide access to a store, vehicle, machine, or other asset without transferring legal ownership. The reporting framework determines how the rights, payment terms, and transfer of ownership benefits and risks affect recognition.
The lessee is the customer using the asset; the lessor provides it. Both sections below use the lessee’s perspective.
IFRS and ASPE comparison
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| Decision | IFRS 16 | ASPE Section 3065 |
|---|---|---|
| Basis | Control of use of an identified asset | Transfer of substantially all ownership benefits and risks determines classification |
| Asset and liability | Generally a right-of-use asset and lease liability, with qualifying exemptions | Capital leases recognize an asset and obligation; operating leases generally recognize rent expense |
| Expense | Depreciation and interest under the general model | Amortization and interest for capital leases; systematic rent expense for operating leases |
IFRS: identification of a lease
A contract’s name is not decisive. The analysis looks for an identified asset, the customer’s right to obtain the economic benefits from use, and its right to direct how and for what purpose the asset is used during the period. In ordinary language, the customer must get the use or value from a specific asset and decide what the asset is used to do. A substantive supplier substitution right can prevent a specific asset from being identified.
Lease or service?
Under IFRS 16, a contract that reserves a specified production machine for one customer, prevents the supplier from practically substituting it, and lets the customer decide how and for what purpose it operates can contain a lease. A contract that promises only a quantity of output while the supplier freely chooses and substitutes the machines generally does not contain an identified asset and is a service arrangement rather than a lease. The contractual rights—not the label on the invoice—drive the assessment.
IFRS: lease term
Under IFRS 16, the lease term starts with the non-cancellable period: the period during which the contract binds both parties. It also includes an extension period when the lessee is reasonably certain to exercise the option, and a period covered by a termination option when the lessee is reasonably certain not to exercise that option. Optional periods cannot extend beyond the period for which the contract is enforceable.
The conclusion can require judgment because pricing, significant leasehold improvements, relocation costs, operational dependence, and other economic incentives can affect whether an option is reasonably certain to be used. The lease term matters because it helps determine which payments enter the liability and how long the right-of-use asset may be depreciated.
The IFRS lessee model
IFRS 16 generally requires a lessee to recognize a right-of-use asset and lease liability. A lessee may elect recognition exemptions for leases that qualify as short term and for leases of low-value assets. A short-term lease has a lease term of 12 months or less at commencement and contains no purchase option; low value is assessed using the value of the underlying asset when it is new.
For a lease within the general IFRS 16 lessee model, the lease liability begins from the present value of included unpaid lease payments. The right-of-use asset starts from the liability and is adjusted for items such as payments made at or before commencement, qualifying initial direct costs, incentives, and specified restoration obligations.
Each future payment is discounted for the time until it is due, and the sum of those present values gives the initial liability. The right-of-use asset represents the lessee’s right to use the underlying asset during the lease term; it is not legal ownership of that asset.
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| Amount | Initial recognition | Subsequent pattern |
|---|---|---|
| Lease liability | Present value of included unpaid lease payments | Interest increases it; payments reduce it; remeasurement can change it |
| Right-of-use asset | Liability adjusted for specified commencement items | Depreciation and impairment reduce it; some remeasurements adjust it |
Record the first year of an equipment lease
On January 1, 2026, Alder Studio begins a three-year equipment lease with three $10,000 payments due each December 31. For this stated IFRS example, the contract is a lease, the general lessee model applies, the annual discount rate is 5%, the initial present value is $27,232, there are no initial direct costs or other adjustments, and the right-of-use asset is depreciated evenly over three years.
Initial liability = $10,000 ÷ 1.05 + $10,000 ÷ 1.05² + $10,000 ÷ 1.05³ = $27,232
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| Account | Debit | Credit |
|---|---|---|
| Right-of-Use Asset — Equipment | 27,232 | |
| Lease Liability | 27,232 |
First-year interest is $27,232 × 5% = $1,362. The $10,000 payment therefore reduces principal by $8,638, leaving an $18,594 liability. Annual straight-line depreciation is $27,232 ÷ 3 = $9,077, subject to rounding.
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| Year | Opening liability | Interest | Payment | Principal reduction | Closing liability |
|---|---|---|---|---|---|
| 2026 | $27,232 | $1,362 | $10,000 | $8,638 | $18,594 |
| 2027 | $18,594 | $930 | $10,000 | $9,070 | $9,524 |
| 2028 | $9,524 | $476 | $10,000 | $9,524 | $0 |
The final row absorbs rounding so the liability reaches zero with the last contractual payment.
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| Account | Debit | Credit |
|---|---|---|
| Interest Expense | 1,362 | |
| Lease Liability | 8,638 | |
| Cash | 10,000 |
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| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense — Right-of-Use Asset | 9,077 | |
| Accumulated Depreciation — Right-of-Use Asset | 9,077 |
Financial-statement effect
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| Statement | Account | Effect |
|---|---|---|
| Income statement | Interest and depreciation | Expenses total $10,439 for 2026 |
| Balance sheet | Right-of-use asset | Net carrying amount becomes $18,155 |
| Balance sheet | Lease liability | Carrying amount becomes $18,594 before current/non-current allocation |
| Cash flow statement | Lease payment | Cash decreases by $10,000; component classification follows IFRS requirements |
- Income statement
- AccountInterest and depreciation
- EffectExpenses total $10,439 for 2026
- Balance sheet
- AccountRight-of-use asset
- EffectNet carrying amount becomes $18,155
- Balance sheet
- AccountLease liability
- EffectCarrying amount becomes $18,594 before current/non-current allocation
- Cash flow statement
- AccountLease payment
- EffectCash decreases by $10,000; component classification follows IFRS requirements
Lease expense and cash payments
Interest is higher earlier when the outstanding liability is larger, while straight-line depreciation can remain constant. Cash payments occur according to the contractual payment schedule. The result is three related but different patterns: liability amortization, asset consumption, and payment timing.
ASPE: capital and operating leases
ASPE Section 3065 classifies a lessee lease as capital when substantially all ownership benefits and risks transfer; otherwise it is operating. The familiar 75-percent-of-economic-life and 90-percent-of-fair-value measures are indicators, not automatic rules.
A capital lease records an asset and obligation at the present value of minimum lease payments excluding executory costs, capped at fair value, then allocates payments between the obligation, interest, and executory costs.
Executory costs are costs of operating or maintaining the leased asset, such as insurance, maintenance, and property taxes. Separate them from the financing component. For a capital lease, the discount rate is the lower of the lessee’s incremental borrowing rate and the implicit rate when that rate can practicably be determined.
An operating lease normally produces straight-line rent expense unless another systematic and rational basis better reflects use.
ASPE operating-lease contrast
Assume the same three annual $10,000 payments as the IFRS example, but the equipment has a ten-year economic life and $50,000 fair value. There is no ownership transfer or bargain purchase option, and the full assessment supports operating classification. There are no incentives, service costs, or uneven use. Total rent of $30,000 over three years produces $10,000 annual rent expense.
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| Account | Debit | Credit |
|---|---|---|
| Rent Expense | 10,000 | |
| Cash | 10,000 |
Profit and cash both decrease by $10,000 for the year. This ASPE operating lease does not create the IFRS example’s right-of-use asset and lease liability. A capital classification would instead require the asset-and-obligation model described above.
Facts that often change the answer
Renewal and termination options, variable payments, incentives, residual guarantees, non-lease service components, asset substitution rights, modifications, and sale-and-leaseback terms can materially change lease accounting.