Lease Accounting

What is Lease Accounting?

Lease accounting is the method businesses use to record leased assets and their corresponding financial obligations on balance sheets. Under current standards, any lease with a term longer than 12 months must appear as a right-of-use (ROU) asset paired with a lease liability, reflecting the present value of future lease payments.

Before ASC 842 and IFRS 16 took effect, companies could keep most operating leases off the balance sheet entirely. Billions of dollars in lease obligations were disclosed only in footnotes, invisible to investors and creditors scanning a company's core financial position. The current standards changed that by requiring lessees to recognize both the asset they're using and the obligation they owe, regardless of lease type.

For businesses with significant leased assets (office space, fleet vehicles, equipment, corporate housing), lease accounting directly affects key financial metrics including debt-to-equity ratios, EBITDA, and return on assets.

How Does Lease Accounting Work Under ASC 842 and IFRS 16?

Both standards share a core requirement: recognize leases on the balance sheet. They differ significantly in how they classify and measure those leases after initial recognition.

Under ASC 842 (US GAAP), lessees classify each lease as either an operating lease or a finance lease. Operating leases produce straight-line total lease expense over the lease term. Finance leases front-load expense recognition through separate depreciation of the ROU asset and interest on the lease liability. Public companies adopted ASC 842 for fiscal years beginning after December 15, 2018, while private companies followed for fiscal years beginning after December 15, 2021 [1].

Under IFRS 16 (international standard), nearly all leases follow a single model that resembles finance lease treatment. The income statement shows depreciation and interest expense, which means total expense is higher in early years and lower in later years compared to straight-line recognition [1].

This classification difference has practical consequences. A company reporting under both standards needs separate tracking systems, different expense categories, and distinct calculations for the same lease [1].

Both standards exempt short-term leases of 12 months or less. IFRS 16 also provides a low-value asset exemption that ASC 842 does not, meaning international reporters can exclude leases of items like laptops or small office equipment from balance-sheet recognition.

ASC 842 vs. IFRS 16: Key Differences

Why Lease Accounting Matters for Business Travel

Corporate travel programs generate lease obligations that many finance teams overlook. Companies leasing fleet vehicles for executive travel, maintaining long-term corporate apartment agreements, or financing booking equipment all hold commitments that fall under ASC 842 or IFRS 16.

The challenge compounds when lease-like arrangements hide inside broader service contracts. A 24-month corporate housing agreement bundled with property management services contains an embedded lease that must be identified, separated, and recorded under the applicable standard. Finance teams that don't have clear processes for flagging these arrangements risk audit findings and restatements.

Travel expense management platforms that integrate with accounting systems help close this gap. When a leased vehicle or corporate apartment generates expense tracking entries, automated categorization routes those costs to the correct cost center and aligns them with the corresponding lease obligation. Navan automates this categorization across travel and corporate card spend, giving finance teams a clearer view of lease-related costs alongside broader T&E data.

Best Practices for Lease Accounting Compliance

Finance leaders who treat ASC 842 and IFRS 16 compliance as ongoing operational work rather than a one-time project report fewer audit issues and faster financial close cycles [2].

Centralize your lease data. Maintain a single source of truth for all lease contracts, including embedded leases identified during contract reviews. Scattered spreadsheets and email-based tracking introduce errors that compound during expense reconciliation and audit preparation.

Build cross-functional communication. Lease modifications, early terminations, rent concessions, and renewal decisions all trigger remeasurement events under both standards. Real estate, legal, and procurement teams must communicate contract changes to accounting promptly so that ROU assets and lease liabilities stay current [2].

Document your assumptions. ASC 842 is principles-based, which means companies make judgment calls on discount rates, lease terms, and purchase option likelihood. Documenting these decisions and getting auditor buy-in proactively reduces friction during year-end audits.

Review your lease portfolio quarterly. Expense forecasting improves when finance teams reassess lease terms and obligations regularly rather than only during annual close. Quarterly reviews catch renewals, terminations, and market-rate adjustments before they create surprises.

Related Terms

• Expense Policy: Rules governing how employees spend company funds, including lease-related travel and accommodation costs.
• Expense Analytics: Data analysis of corporate spending patterns that helps finance teams identify lease cost trends and optimization opportunities.

Sources

[1] KPMG, "Lease Accounting: IFRS Accounting Standards vs US GAAP," December 2025. https://kpmg.com/us/en/articles/2025/lease-accounting-ifrs-standards-us-gaap.html

[2] Financial Executives International (FEI), "12-Step Roadmap to Ongoing ASC 842 and IFRS 16 Compliance for Finance Leaders," September 2025. https://www.financialexecutives.org/FEI-Daily/September-2025/12-Steps-to-Staying-Ahead-on-Lease-Accounting-in-2.aspx