Right-of-use asset and lease liability (IFRS 16)
What are a right-of-use asset and a lease liability, and do lenders count them as debt?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A right-of-use asset and a lease liability are how IFRS 16, adopted as AASB 16 in Australia and NZ IFRS 16 in New Zealand, puts most leases on a lessee's balance sheet: the liability is the present value of the lease payments over the lease term, and the asset is the right to use the property or equipment. Rent becomes depreciation and interest, so EBITDA and operating cash flow rise while the cash paid is unchanged. UK FRS 102 follows a similar model from 2026; special-purpose and micro-entity accounts usually do not. Whether a lender counts the liability as debt depends on the facility agreement.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// THE FULL PAGE
Right-of-Use Asset and Lease Liability: a Worked Example →
The rent is the same. The accounts now record it as a loan.
// WHAT IT IS NOT
A finance lease is a kind of lease contract whose economics are a loan; the right-of-use asset and lease liability are the accounting now applied to most leases a lessee holds, whether the contract would once have been called a finance or an operating lease.
// WORKED IN
// NEXT TO IT
THE ACCOUNTS AND THE AUDIT FILE
- Going concern
- Management accounts
- Related-party transactions
- Capitalised costs
- Contingent liabilities
- Bank confirmation (audit)
- Qualified audit opinion
- Subsequent event
- Debt classification on a covenant breach
- Shareholder current account
- Contract assets (unbilled revenue)
- Percentage-of-completion revenue (input and output methods)
- Customer prepayments (deferred income)
- Window dressing (period-end debt)
- Intercompany balances
- Doubtful debts provision (expected credit loss allowance)
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