What is Lease Accounting?
Lease accounting is the set of rules used to record leases in the financial statements of lessees and lessors. Since IFRS 16, lessees recognise nearly all leases on the balance sheet as a right-of-use asset and a corresponding lease liability, eliminating the old distinction between operating and finance leases for most lessees.
How It Works
- Identify the contract and confirm it conveys the right to control an identified asset for a period of time.
- Calculate the lease liability as the present value of remaining lease payments.
- Recognise a right-of-use asset equal to the liability plus initial direct costs and prepayments.
- Charge depreciation on the asset and interest on the liability to profit or loss over the lease term.
Saudi Context
Saudi entities reporting under IFRS as adopted by SOCPA apply IFRS 16 to office leases, retail outlets, warehouses, and equipment leases. ZATCA accepts the IFRS 16 treatment for income tax base purposes; zakat base treatment is being aligned to IFRS 16 with updated guidance.
Example
A Riyadh company signs a 5-year office lease at SAR 200,000 per year. It records a SAR 800,000 right-of-use asset and lease liability. Depreciation and interest are charged each year over the lease term.