Lease Accounting Glossary
This glossary covers key concepts relevant to IFRS 16, ASC 842 and FRS 102 Section 20. It provides clear, search-friendly definitions for the terms most likely to be used across lease accounting guidance, product content and related articles.
Core lease terminology
Asset
A resource controlled by an entity as a result of past events and expected to provide future economic benefits. In a lease context, this is normally the underlying asset or the recognised right-of-use asset.
Commencement date
The date on which a lessor makes the underlying asset available for use by the lessee. This is when a lessee generally recognises the lease liability and right-of-use asset.
Contract
An agreement that creates enforceable rights and obligations. A contract may contain a lease even when it is not described as a lease agreement.
Control of use
The lessee’s ability, throughout the period of use, to obtain substantially all economic benefits from an identified asset and direct how and for what purpose it is used.
Economic life
The period over which an asset is expected to be economically usable by one or more users, or the number of production units expected from it.
Enforceable period
The period during which neither party can terminate the lease without permission from the other party, or without more than an insignificant penalty.
Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Identified asset
An asset that is explicitly or implicitly specified in a contract and is physically distinct, or represents substantially all of the capacity of a physically distinct asset.
In-substance fixed payment
A payment that is variable in legal form but is, in substance, unavoidable. It is included in lease payments when measuring the lease liability.
Lease
A contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Lease component
A distinct right to use an underlying asset. A contract can contain one or more lease components and may also include non-lease components.
Lease incentives
Payments or other benefits provided by the lessor to encourage a lessee to enter into a lease, such as reimbursement of costs or rent-free periods.
Lease payments
Payments made by a lessee to a lessor for the right to use an underlying asset, including fixed payments and certain variable amounts specified by the relevant accounting standard.
Lease term
The non-cancellable period for which a lessee has the right to use an asset, adjusted for extension and termination options when the lessee is reasonably certain to exercise or not exercise them.
Lessee
The party that obtains the right to use an underlying asset in a lease.
Lessor
The party that provides the right to use an underlying asset in a lease.
Non-lease component
A good or service transferred under a contract that is separate from the right to use an underlying asset, for example maintenance or cleaning services.
Peppercorn lease
A lease where the rent is nominal or very low, often significantly below market value.
Residual value
The estimated value of an underlying asset at the end of a lease term.
Underlying asset
The asset that is the subject of a lease and to which the lessee has the right to use.
Variable lease payment
A payment that changes because of facts or circumstances occurring after the commencement date, such as usage, performance or an index or rate.
Standards, classifications and scope
ASC 842
The US GAAP lease accounting standard in Topic 842. Lessees recognise most leases on the balance sheet, while operating and finance leases retain different expense patterns.
Contract modification
A change to the scope of, or consideration for, a contract that is approved by the parties. The accounting treatment depends on the relevant standard and whether the modification creates a separate lease.
Finance lease
For ASC 842 lessees and for lessor accounting, a lease that transfers substantially all risks and rewards or meets one of the finance-lease classification criteria. Under IFRS 16, lessee accounting does not distinguish finance and operating leases.
FRS 102 Section 20
The UK and Republic of Ireland financial reporting requirements for leases under FRS 102. The 2024 Periodic Review introduces a revised lease model for accounting periods beginning on or after 1 January 2026, subject to early adoption provisions.
IFRS 16
The International Financial Reporting Standard for leases. Its lessee model generally requires recognition of a right-of-use asset and lease liability for leases longer than 12 months unless the underlying asset is of low value.
Lease classification
The assessment used to determine the accounting model applied to a lease. Classification differs by standard and is particularly relevant to ASC 842 and lessor accounting.
Low-value asset exemption
An IFRS 16 recognition exemption for leases of underlying assets that are of low value when new. A lessee may expense qualifying payments rather than recognising a right-of-use asset and lease liability.
Operating lease
Under ASC 842, a lease that does not meet the finance-lease criteria and has a single generally straight-line lease cost. The term also remains relevant to lessor accounting and older FRS 102 terminology.
Portfolio approach
Applying accounting requirements to a portfolio of leases with similar characteristics when the effect is not materially different from accounting for each lease individually.
Practical expedient
A relief permitted by an accounting standard that simplifies application, for example a short-term lease exemption or a policy election not to separate lease and non-lease components.
Recognition exemption
A policy election that allows a lessee to avoid recognising a right-of-use asset and lease liability for qualifying leases, subject to the requirements of the applicable standard.
Short-term lease
A lease with a lease term of 12 months or less at commencement and no purchase option that the lessee is reasonably certain to exercise. Qualifying lessees may elect an exemption.
Sublease
A transaction in which a lessee grants the right to use an underlying asset to a third party while the original head lease remains in force.
Supplier substitution right
A contractual right allowing a supplier to substitute an asset. It prevents a contract from containing a lease only when the supplier has both the practical ability to substitute and would benefit economically from doing so.
Transition
The process of moving from a previous lease accounting model to a new or amended standard, including the chosen transition method, comparative treatment and opening balance adjustments.
Measurement, journals and reporting
Amortisation
The systematic allocation of the depreciable amount of an intangible asset or, in lease accounting, the reduction of a right-of-use asset over its useful life or lease term.
Amortisation schedule
A period-by-period schedule showing how a lease liability or right-of-use asset changes over the term, including payments, interest, depreciation and closing balances.
Carrying amount
The amount at which an asset or liability is recognised in the statement of financial position after accumulated depreciation, amortisation, impairment or remeasurement.
Dilapidation provision
An estimated liability for costs to restore or repair a leased property at the end of the lease. The initial estimate of these costs may form part of the cost of the right-of-use asset.
Discount rate
The rate used to calculate the present value of future lease payments. It may be the rate implicit in the lease or, when that is not readily determinable, the lessee’s incremental borrowing rate.
Effective interest method
A method that calculates interest expense by applying a constant periodic rate of interest to the outstanding lease liability.
Fixed payment
A payment that is fixed in amount, including in-substance fixed payments, less any lease incentives receivable.
Gross investment in the lease
For lessor accounting, the total of lease payments receivable and any unguaranteed residual value accruing to the lessor.
Impairment
A reduction in the carrying amount of an asset when its recoverable amount is lower than its carrying amount. Right-of-use assets are subject to impairment requirements.
Incremental borrowing rate (IBR)
The interest rate a lessee would have to pay to borrow, over a similar term and with similar security, the funds needed to obtain an asset of similar value in a similar economic environment.
Initial direct costs
Incremental costs of obtaining a lease that would not otherwise have been incurred, such as qualifying commissions or legal fees. Treatment differs between lessee and lessor accounting models.
Initial measurement
The first measurement of a recognised lease asset or liability at the commencement date, based on the requirements of the applicable accounting standard.
Interest rate
The rate used in lease accounting to discount future lease payments and calculate interest on the lease liability.
Lease liability
The present value of lease payments not paid at the commencement date. It is subsequently increased for interest and reduced for payments, subject to remeasurement where required.
Net investment in the lease
For a lessor, the gross investment in the lease discounted at the interest rate implicit in the lease.
Present value
The current value of future cash flows discounted using an appropriate rate of interest.
Rate implicit in the lease
The discount rate that causes the present value of lease payments and unguaranteed residual value to equal the fair value of the underlying asset plus the lessor’s initial direct costs.
Remeasurement
A revision of a recognised lease liability and related right-of-use asset following a change in lease term, purchase option assessment, specified payments, an index or a rate, as required by the applicable standard.
Right-of-use asset (ROU asset)
An asset representing a lessee’s right to use an underlying asset for the lease term. It is initially measured using the lease liability, adjusted for items such as prepayments, incentives and initial direct costs.
Straight-line expense
Expense recognised evenly over the lease term. It is commonly associated with operating-lease expense under ASC 842 and with qualifying short-term or low-value lease exemptions.
Subsequent measurement
The measurement of a lease asset or liability after initial recognition, including interest, depreciation or amortisation, payments, impairment and remeasurement.
Unearned finance income
For lessor accounting, the difference between the gross investment in a lease and the net investment in the lease; it is recognised as finance income over the lease term.
Upfront costs
Costs incurred at or before the start of a lease, such as initial direct costs, that may affect initial lease accounting.
Options, payments and lease administration
Break clause
A contractual provision allowing a party to end a lease before the stated end date, often subject to notice periods or penalties. It must be assessed when determining the enforceable period and lease term.
Break payment
A payment made when a lease is terminated early. Its treatment depends on the contractual terms and the applicable accounting requirements.
CPI-linked payment
A lease payment that changes in line with a consumer price index or similar published index. Changes based on an index or rate may trigger remeasurement of the lease liability.
End-of-term option
A contractual right or obligation at the end of a lease, such as an option to extend, terminate, purchase or return the underlying asset.
Extension option
A contractual right allowing the lessee to extend the lease term beyond the non-cancellable period. It is included in the lease term when the lessee is reasonably certain to exercise it.
Guaranteed residual value
The portion of an underlying asset’s residual value that is guaranteed to the lessor by the lessee or another party unrelated to the lessor.
Indexation
The contractual adjustment of lease payments by reference to an index or rate, such as CPI or RPI. Lease systems need the index, timing and payment rules to support accurate remeasurement.
Lease abstraction
The structured extraction of key lease terms, dates, payment details, options and clauses from a lease contract into a register or lease accounting system.
Lease accounting system
Software used to maintain lease data, calculate schedules, process accounting entries, support disclosures and retain an audit trail for lease accounting.
Lease incentives
Benefits provided by a lessor to encourage a tenant to enter a lease, such as rent-free periods or cash contributions.
Lease register
A central record of leases and their key contractual, financial and accounting data. It supports completeness, reporting, audit and ongoing change management.
Mid-term adjustment
A change made during the lease term, such as changes to payments, terms, index-linked rent, or other lease conditions.
Purchase option
A contractual right for the lessee to buy the underlying asset. Lease term and classification assessments may depend on whether the lessee is reasonably certain to exercise it.
Rent-free period
A period at the start of, or during, a lease term when no rent is payable. It is normally reflected in the overall measurement of lease payments rather than treated as a separate lease.
Termination option
A contractual right allowing the lessee or lessor to end a lease before its stated end date. The assessment of whether it is reasonably certain to be exercised affects the lease term.
Variable consideration
Consideration under a contract that changes based on an event or condition. In leases, the precise accounting treatment depends on whether it is linked to an index or rate, usage, performance or another factor.
WACC (weighted average cost of capital)
A blended cost of debt and equity often used as a reference point when developing discount-rate methodologies. It is not automatically the appropriate incremental borrowing rate for every lease.
Governance, disclosure and audit
Audit trail
A chronological record showing data changes, approvals, calculations and journals. In lease accounting it supports traceability from contract terms through to financial statements.
Completeness assessment
A process to identify leases and embedded leases that may be missing from the lease register or financial statements, often using procurement, property, AP and contract data.
Disclosure requirements
Information that an entity must include in its financial statements about leases, such as maturity analysis, expense, cash flows, significant judgements and carrying amounts.
Embedded lease
A lease contained within a wider service, outsourcing or supply contract. The contract may contain a lease if it gives control over use of an identified asset.
Judgement
A management assessment made when applying an accounting standard, for example determining the lease term, discount rate or whether a supplier substitution right is substantive.
Lease modification workflow
The controlled process for identifying, approving, recording and accounting for changes to a lease’s scope, consideration, term or other key terms.
Materiality
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions made by users of financial statements.
Maturity analysis
A disclosure or report that groups undiscounted lease payments by the period in which they fall due, helping users assess timing of lease-related cash outflows.
Reconciliation
The process of comparing lease data and calculated balances with source contracts, payment records, general ledger balances and financial statement disclosures to identify differences.
Segregation of duties
The allocation of responsibilities so that no individual controls all key stages of a process. In lease administration, this helps separate data entry, approval, journal posting and review.
Significant judgement
A judgement that has a material effect on the amounts recognised or disclosed in the financial statements, such as the lease term or discount rate.
Source document
The original contract, amendment, invoice, payment schedule or other evidence used to support lease data and accounting decisions.
Put these terms into practice
FMIS lease accounting software helps UK finance teams maintain a complete lease register, calculate schedules and journals, and stay compliant with IFRS 16 and the 2026 FRS 102 lease changes.
