Following some useful feedback from readers on last week’s article about accounting for leases, I will show a practical example as to how the assets, liabilities and income statement expenses associated with them are calculated.
A company signs an agreement with a landlord to rent a property for 10 years at an annual rent of £1m a year. The interest rate in the lease is 6 per cent and there are no break clauses in the agreement.
The initial right-of-use asset and lease liability that will go on the balance sheet are calculated by discounting the future annual rent payments to a present value using a discount rate of 6 per cent.
