What is Lease Liability?
A lease liability under IFRS 16 is the present value of the future lease payments that a lessee has yet to pay under a lease contract. It is recognised on the balance sheet alongside a right-of-use asset at lease commencement.
How It Works
- Identify the future lease payments — fixed, in-substance fixed, and variable based on an index.
- Determine the discount rate — the interest rate implicit in the lease or the lessee’s incremental borrowing rate.
- Compute the present value of the lease payments.
- Recognise the lease liability at commencement equal to that present value.
- Re-measure the liability when lease terms change or when an index linked to payments updates.
Saudi Context
Saudi corporates and retailers carry significant lease liabilities under SOCPA-adopted IFRS 16, particularly real estate, fleet vehicles, and equipment. ZATCA accepts the lease interest and depreciation as deductible expenses under the income tax framework.
Example
A retailer signs a 5-year lease with SAR 1M annual rent. Using a 6% incremental borrowing rate, the present value is about SAR 4.21M. The retailer recognises a lease liability of SAR 4.21M and a right-of-use asset of SAR 4.21M.