IFRS 16 requires lessees to capitalize all leases (with exceptions for short-term leases and leases of low-value assets). Capitalizing a lease means the lessee will:
(1) Recognize a right-of-use asset upon commencement of the lease
(2) Recognize a lease liability upon commencement of the lease
(3) Record depreciation expense throughout the lease
(4) Record interest expense throughout the lease
The depreciation expense pertains to the right-of-use asset, while the interest expense pertains to the lease liability. This will result in a front-loading of expenses during the lease, since interest expense will be higher in the early periods of the lease (since the lease liability will be higher in the early periods, and interest expense is calculated using the lease liability).
Note that the lessee’s interest expense could be different from the lessor’s interest revenue if the lessee’s lease liability differs from the lessor’s lease receivable.
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