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As per IFRS 16.81, a lessor recognises payments from operating leases as income on a straight-line basis. However, a different systematic approach can be used if it is more representative of the manner in which the benefit from the use of the underlying asset diminishes.

The formula is quite simple ? you just multiply the annual lease payment by the present value factor, and that results in the net present value of future minimum lease payments, which is recorded on the balance sheet as the lease liability (and ROU asset).

A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.

ASC 842, or Topic 842, is the new lease accounting standard issued by the FASB and governs how entities record the financial impact of their lease agreements. Among other changes, it requires all public and private entities reporting under US GAAP to record the vast majority of their leases to the balance sheet.

Calculate the present value of all lease payments; this will be the recorded cost of the asset. Record the amount as a debit to the appropriate fixed asset account, and a credit to the capital lease liability account.

A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.

For operating leases, the lessor continues depreciating the leased asset and records the incoming lease receipts as revenue on a straight-line basis over the lease term.