Yes, leased assets should be recognized in the financial statements under modern accounting standards. Both IFRS and US GAAP now require most leases to be recorded on the lessee’s balance sheet to reflect the right to use the leased asset and the corresponding lease obligation. This recognition enhances transparency, comparability, and completeness of financial reporting.
1. Background: Traditional vs Modern Approach
- Old Approach: Previously, only finance leases were recognized on the balance sheet, while operating leases were disclosed off-balance sheet.
- New Approach: Under IFRS 16 (and ASC 842 in the US), lessees must recognize almost all leases as assets and liabilities.
2. IFRS 16: Recognition Requirements
- Right-of-Use Asset: Lessees must recognize an asset representing the right to use the leased item during the lease term.
- Lease Liability: Recognize a corresponding liability for lease payments to be made.
- Exceptions: Leases with a term of 12 months or less and low-value assets (e.g., tablets, printers) can be excluded.
3. Accounting Treatment for Lessees
- Initial Measurement: Right-of-use asset is measured at cost, including initial lease payments, direct costs, and restoration obligations.
- Subsequent Measurement: The asset is depreciated over the lease term, and the liability is reduced as lease payments are made.
4. Accounting Treatment for Lessors
- Finance Lease: Recognize a receivable equal to the net investment in the lease.
- Operating Lease: Continue to recognize the underlying asset and recognize rental income over the lease term.
5. Benefits of Recognising Leased Assets
- Transparency: Provides a complete picture of the company’s financial obligations and assets used in operations.
- Comparability: Aligns lease accounting across industries and improves comparability between companies.
- Informed Decision-Making: Stakeholders have better visibility into capital structure and asset utilization.
Recognition of Leased Assets Enhances Financial Integrity
Recognizing leased assets ensures that all significant rights and obligations are reflected in the financial statements. Under IFRS 16 and similar standards, leased assets and corresponding liabilities must be presented on the balance sheet—enhancing the reliability and relevance of financial reporting for investors, lenders, and regulators.