Financial Reporting · Leasing

Lessee Lease Liability Schedule and ROU Depreciation

Updated 11 October 2026 · Fact-checked

After day one, a lessee depreciates the right-of-use asset over the shorter of the lease term and useful life, and builds a liability table: opening balance, plus finance cost at the interest rate, less payment. The next year's reduction in principal is the current liability.

Understand Lessee Subsequent Measurement and Lease Liability Schedule

On day one the lessee records a right-of-use (ROU) asset and a lease liability. Afterwards, these two balances move separately. You must track each one.

The ROU asset is depreciated like other non-current assets, usually straight-line. The period is the lease term. If ownership transfers to you at the end, or you are reasonably certain to exercise a purchase option, use the useful life instead. The residual value is usually nil for a leased asset you will hand back.

The lease liability works like a loan. Each year interest (finance cost) is added to the balance. Then the payment is taken off. The interest is the opening balance multiplied by the rate implicit in the lease, or the lessee's incremental borrowing rate if that cannot be determined. The rate is given in the exam.

Timing of payments matters. If payments are made in advance (on the first day of each year), the first payment reduces the liability straight away, before any interest builds up. Interest then accrues only on the balance after that payment. If payments are in arrears (year end), interest builds on the full opening balance first, then the payment is deducted.

For the statement of financial position, split the liability. The current portion is the principal that will be repaid within 12 months. The rest is non-current. The current portion is the liability now, less the liability expected at the next year end (after next year's interest and payment). Do not use the payment itself unless it is all principal.

Key rules to remember

ROU depreciation: Annual depreciation = (ROU cost − residual value) ÷ shorter of lease term and useful life; Use useful life if ownership transfers or a purchase option is reasonably certain to be exercised.
Finance cost (arrears): Finance cost = opening liability × interest rate; Payment at year end. Closing = opening + finance cost − payment.
Finance cost (advance): Finance cost = (opening liability − payment made at start) × interest rate; Payment at start of year. Closing = opening − payment + finance cost.
Current liability: Current portion = liability at this year end − liability at next year end; This is the principal repaid in the next 12 months. Non-current = total liability − current portion.
Initial liability: Liability = present value of lease payments not yet paid, discounted at the rate; Initial ROU asset = liability + payments made at or before start + initial direct costs + restoration costs − incentives received.

How to solve Lessee Subsequent Measurement and Lease Liability Schedule questions

Follow this order for any lessee schedule question. Work in a clear table and keep the asset and liability apart.

1Find the initial lease liability (present value of payments) and the initial ROU asset cost.
2Note whether payments are in advance or arrears and the interest rate given.
3Calculate ROU depreciation using the lease term (or useful life if ownership passes). Compute the charge for the period required.
4Build the liability table: opening balance, less any advance payment, plus finance cost, less any arrears payment, equals closing balance.
5Read off the closing liability at the reporting date, and compute the next year's closing balance to find the current portion.
6Write the extracts: statement of profit or loss (depreciation and finance cost) and statement of financial position (ROU asset at carrying amount, current and non-current liability).
7Check that the closing liability is sensible, falling towards nil by the end of the term.

Quickest way: Table-first method

When to use it: Use it in Section C or OT cases when you are given the liability, rate and payment and need a year-end balance or a split.

Draw four columns: opening, interest, payment, closing.
For advance payments, deduct the payment before calculating interest.
Roll forward two years if the question asks for the current portion.
Subtract next year's closing balance from this year's closing balance. That is current.
Depreciate the ROU asset in one line: cost ÷ term × time elapsed.

Common mistakes in Lessee Subsequent Measurement and Lease Liability Schedule

Charging interest on the full opening balance when payments are in advance.
Students use the arrears pattern automatically.
Fix: Deduct the first-day payment first, then multiply the remainder by the rate.
Using the annual payment as the current liability.
It looks like the amount due within 12 months.
Fix: The payment includes interest. Current liability is the fall in the liability: this year's closing less next year's closing.
Depreciating the ROU asset over the useful life when ownership does not transfer.
Habit from owned assets.
Fix: Use the shorter of lease term and useful life unless ownership transfers or a purchase option is reasonably certain.
Treating the full payment as an expense in profit or loss.
Old operating-lease thinking.
Fix: Under IFRS 16 the payment reduces the liability. The expense is depreciation plus finance cost.
Part-year errors when the lease starts mid-year.
Students apply a full year of interest and depreciation.
Fix: Time-apportion both the interest and depreciation from the start date.
Forgetting to include payments made at the start, or initial direct costs, in the ROU asset.
Only the liability is used as the asset cost.
Fix: Add advance payments and direct costs to the liability, and deduct incentives, to get the ROU asset cost.

Worked examples

Example 1

On 1 January 20X1 Rho leases a machine for 3 years. Annual payments of $10,000 are made on 31 December each year, starting 31 December 20X1. The interest rate is 10%. The lease liability at inception is $24,869. Prepare the liability table, calculate depreciation for 20X1 (no residual value, useful life 5 years), and show the 31 December 20X1 current and non-current liability.

Show the solution

Depreciation: lease term 3 years is shorter than useful life 5 years, and ownership does not transfer. $24,869 ÷ 3 = $8,290 (rounded).
20X1: opening 24,869; interest 10% = 2,487; payment (10,000); closing 17,356.
20X2: opening 17,356; interest = 1,736; payment (10,000); closing 9,092.
Current liability at 31 Dec 20X1 = 17,356 − 9,092 = 8,264.
Non-current liability = 17,356 − 8,264 = 9,092.

Answer: Depreciation $8,290; finance cost $2,487; liability at 31 Dec 20X1 $17,356, of which current $8,264 and non-current $9,092.

Example 2

On 1 January 20X1 Sigma leases equipment for 3 years at $12,000 per year, payable annually in advance on 1 January. The rate is 8%. Present value of the payments is $33,400 (rounded) at inception, which includes the first payment. Calculate the liability at 31 December 20X1 and the current liability.

Show the solution

1 Jan 20X1: liability 33,400. Pay first instalment 12,000. Balance 21,400.
Interest for 20X1 = 21,400 × 8% = 1,712.
Closing 31 Dec 20X1 = 21,400 + 1,712 = 23,112.
On 1 Jan 20X2 pay 12,000. Balance 11,112.
Interest for 20X2 = 11,112 × 8% = 889 (rounded). Closing 31 Dec 20X2 = 12,001.
Current liability = 23,112 − 12,001 = 11,111. This equals the 1 Jan 20X2 payment of 12,000 less the 20X2 interest of 889 (difference of 1 is rounding).
Non-current = 23,112 − 11,111 = 12,001.

Answer: Liability at 31 December 20X1 is $23,112: current $11,111 and non-current $12,001. Finance cost for 20X1 is $1,712.

Exam tips

Read the payment date first. Advance versus arrears changes every interest figure.
Show the table even for a one-line OT answer. It protects method marks in Section C.
Always state the depreciation period and the reason for it.
For the split, compute next year's closing liability. Do not guess from the payment.
Show finance cost and depreciation separately in the profit or loss extract.

Practice questions from Leasing

Lessee Subsequent Measurement and Lease Liability Schedule in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Lessee Subsequent Measurement and Lease Liability Schedule: frequently asked questions

How do I split a lease liability into current and non-current?

Roll the liability forward one more year. The current portion is this year-end liability less next year-end liability. The remainder is non-current.

Over what period do I depreciate a right-of-use asset?

Use the shorter of the lease term and the useful life. Use the useful life if ownership transfers at the end or a purchase option is reasonably certain to be exercised.

What is the difference between payments in advance and in arrears?

In advance, the payment is made at the start of the year, so it reduces the balance before interest is charged. In arrears, interest is charged on the full opening balance and the payment is deducted at year end.

Is the lease payment an expense in profit or loss?

No, for a normal lease the payment reduces the lease liability. Profit or loss shows depreciation on the right-of-use asset and the finance cost on the liability.