Lessee accounting

In this lesson

1. 0:00 Lessee accounting at inception
2. 0:41 Calculating the lease liability
3. 1:03 Lease payments included in valuation
4. 1:30 Subsequent asset measurement
5. 2:12 Subsequent liability measurement
6. 3:10 Alternative measurement models
7. 3:54 Worked example: three year lease
8. 6:27 Right of use asset depreciation
9. 7:14 Short term and low value exemptions
10. 7:58 Required financial statement disclosures

About this lesson

This video covers the core mechanics you need for Financial Reporting and Strategic Business Reporting papers, with a worked example showing how to account for lease payments, interest charges, and depreciation over the lease term. You'll also discover the optional exemptions for short-term and low-value leases, plus the key disclosures required in financial statements. The session starts by breaking down the initial recognition of a lease. The right-of-use asset is measured at cost, which includes the lease liability, any upfront payments, less incentives received, and direct costs of setting up the lease. The lease liability is calculated as the present value of all future lease payments, discounted at the implicit rate in the lease (or your incremental borrowing rate if that's not available). Lease payments include fixed amounts, variable payments linked to indices, residual value guarantees, purchase options, and termination penalties. Once recognised, both elements are measured differently. The asset is depreciated over the shorter of the lease term or the asset's useful life, charged to profit or loss. The liability is treated like a loan: interest is charged each year at the implicit rate, increasing the carrying amount, whilst actual cash payments reduce it. The liability is also reassessed if the lease term changes, purchase options are exercised, or payment terms shift. The video walks through a practical three-year lease example, showing exactly how to calculate the liability using discounted cash flows and then track it year by year as interest accrues and payments are made. Finally, you'll see the optional exemptions available. Short-term leases (under 12 months) and low-value assets (based on their new cost, not current condition) can be expensed directly without recognising an asset or liability. The video closes with the disclosure requirements: you must show where right-of-use assets appear in the balance sheet, depreciation charged, additions during the year, carrying amounts, cash outflows, interest expense on liabilities, maturity analysis, and details of any exempted leases.

Duration: 9m