Leases
Treatment under IFRS
Lessees apply a single on-balance-sheet model and recognise almost all leases as a right-of-use asset and a corresponding lease liability. The only exemptions are short-term leases and leases of low-value underlying assets.
- At commencement, the right-of-use asset is measured at cost (the present value of the lease payments).
- After initial recognition the lease liability is measured at amortised cost using the effective interest method.
- The right-of-use asset is measured at cost less accumulated depreciation and accumulated impairment losses.
- Recognition exemptions (election): short-term leases (≤ 12 months) and low-value assets; the related payments are then expensed on a straight-line basis.
- Lessors continue to classify leases as either finance or operating leases.
Treatment under German GAAP (HGB)
German GAAP contains no dedicated leasing standard. Recognition follows beneficial (economic) ownership: the leased asset is recognised by the lessee if substantially all risks and rewards are attributed to it. In practice the assessment follows the tax leasing decrees; operating leases stay off-balance-sheet.
- § 246 (1) HGB: assets are attributed according to beneficial (economic) ownership.
- § 247 (2) HGB: recognition within non-current assets only where the lessee is the beneficial owner.
- Leases are classified as finance or operating leases; the attribution follows the tax leasing decrees and may differ from the IFRS assessment.
- Operating lease payments are expensed on a straight-line basis by the lessee; other financial commitments are disclosed in the notes under § 285 No. 3 HGB.
Key differences
- Under German GAAP operating leases remain off-balance-sheet (no right-of-use asset and no lease liability for the lessee).
- No single lease definition; attribution follows the tax leasing decrees rather than a control-based concept.
- IFRS 16 typically increases total assets and changes EBITDA/EBIT as well as leverage ratios.
- Considerably lower transparency under German GAAP; essentially only a note disclosure under § 285 No. 3 HGB.
Example
Worked example
Assumptions: 5-year office lease, no extension or purchase option, no residual-value guarantee. Annual payment €100,000 in arrears (at each year-end). Incremental borrowing rate (IBR) 5%. No initial direct costs and no lease incentives. The HGB case is an operating lease. Note: payment is made in arrears (at year-end); if paid in advance (at the start of the year) the amounts shift accordingly. All amounts in euros, rounded to whole euros; due to rounding, figures may differ by ±€1.
Step 1 – Initial measurement at commencement (IFRS)
The right-of-use asset and the lease liability are recognised at the present value of the five lease payments. The annuity present-value factor at 5% over 5 years is 4.32948.
- Lease liability = right-of-use asset = €100,000 × 4.32948 = €432,948
- Straight-line depreciation of the right-of-use asset: €432,948 ÷ 5 ≈ €86,590 p.a. (€86,589–86,590 due to rounding)
Under HGB (operating lease) there is no balance-sheet recognition; the rent is expensed on a straight-line basis over the term.
Step 2 – Lease liability amortisation schedule (effective-interest method, IFRS)
| Year | Opening | Interest (5%) | Payment | Closing |
|---|---|---|---|---|
| 1 | 432,948 | 21,647 | −100,000 | 354,595 |
| 2 | 354,595 | 17,730 | −100,000 | 272,325 |
| 3 | 272,325 | 13,616 | −100,000 | 185,941 |
| 4 | 185,941 | 9,297 | −100,000 | 95,238 |
| 5 | 95,238 | 4,762 | −100,000 | 0 |
| Σ | — | 67,052 | −500,000 | 0 |
Step 3 – Right-of-use asset depreciation schedule (IFRS)
| Year | Opening | Depreciation | Closing |
|---|---|---|---|
| 1 | 432,948 | 86,590 | 346,358 |
| 2 | 346,358 | 86,589 | 259,769 |
| 3 | 259,769 | 86,590 | 173,179 |
| 4 | 173,179 | 86,589 | 86,590 |
| 5 | 86,590 | 86,590 | 0 |
| Σ | — | 432,948 | 0 |
Step 4 – Balance-sheet effect (at each year-end)
Right-of-use asset versus lease liability under IFRS. A negative net figure means a net lease liability (the liability exceeds the asset). Under HGB nothing appears on the balance sheet.
| Year-end | RoU asset | Liability | Net (IFRS) | HGB |
|---|---|---|---|---|
| 1 | 346,358 | 354,595 | −8,237 | 0 |
| 2 | 259,769 | 272,325 | −12,556 | 0 |
| 3 | 173,179 | 185,941 | −12,762 | 0 |
| 4 | 86,590 | 95,238 | −8,648 | 0 |
| 5 | 0 | 0 | 0 | 0 |
Step 5 – Income-statement effect (expense per year)
Under IFRS the expense comprises depreciation (constant) and interest (decreasing); under HGB a constant rent expense. The total expense over the term is identical in both systems (€500,000), but IFRS is front-loaded – higher in the early years, lower later.
| Year | IFRS depr. | IFRS interest | IFRS total | HGB rent | Difference |
|---|---|---|---|---|---|
| 1 | 86,590 | 21,647 | 108,237 | 100,000 | +8,237 |
| 2 | 86,589 | 17,730 | 104,319 | 100,000 | +4,319 |
| 3 | 86,590 | 13,616 | 100,206 | 100,000 | +206 |
| 4 | 86,589 | 9,297 | 95,886 | 100,000 | −4,114 |
| 5 | 86,590 | 4,762 | 91,352 | 100,000 | −8,648 |
| Σ | 432,948 | 67,052 | 500,000 | 500,000 | 0 |
Step 6 – Journal entries (Year 1)
IFRS – commencement (start of the lease):
| Account | Debit | Credit |
|---|---|---|
| Right-of-use asset | 432,948 | |
| Lease liability | 432,948 |
IFRS – at the end of Year 1:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 86,590 | |
| Right-of-use asset (accum. depreciation) | 86,590 | |
| Interest expense | 21,647 | |
| Lease liability (principal) | 78,353 | |
| Bank | 100,000 |
HGB – operating lease: no entry at commencement; the future commitment is disclosed in the notes (§ 285 No. 3a HGB). At the end of Year 1:
| Account | Debit | Credit |
|---|---|---|
| Rent expense | 100,000 | |
| Bank | 100,000 |
Key takeaway
The total expense is the same under both frameworks (€500,000). IFRS, however, recognises it on a front-loaded basis: higher in the early years (depreciation plus high initial interest) and lower later. The cumulative additional IFRS expense equals the net lease liability in every year from Step 4 (Year 1: €8,237; Year 2: €12,556; Year 3: €12,762; Year 4: €8,648; Year 5: €0). IFRS 16 also increases total assets and shifts expense from rent to depreciation and interest – with a corresponding effect on EBITDA and EBIT.