Bill moves in September. The sequence of events takes three weeks and costs more than he planned, which he planned for, because EP.15 and EP.16 existed even if he did not call them that.
The flat is a shared apartment, three bedrooms, two flatmates he found through a housing platform. The rent is 600 per month. The landlord requires two months deposit upfront. Bill writes a bank transfer for 1,200 euro on the first of September and watches his savings drop to 5,040 in a single transaction.
Under IFRS 16, a lease creates two entries simultaneously: a right-of-use asset, representing the value of the right to occupy the property, and a lease liability, representing the obligation to pay future rent. The asset and the liability are equal at inception. Over time, the asset depreciates and the liability reduces as payments are made.
When Bill signs the lease, he acquires something: the right to live in that flat for the duration of the contract. He also commits to something: 600 euro per month for twelve months, a total obligation of 7,200 euro.
That is the general model. IFRS 16 also carries an exemption, and Bill falls squarely inside it. A lessee may choose not to recognise a right-of-use asset and a lease liability for leases of twelve months or less that carry no purchase option. Bill's contract is exactly twelve months with no option to buy, so he elects the exemption: no asset, no liability, and the rent is recognised as an expense on a straight-line basis across the term. The balance sheet stays clean, and the 600 flows through the income statement each month.
The deposit of 1,200 euro is not an expense. It is a recoverable asset: money held by the landlord that Bill will receive back at the end of the lease, assuming he leaves the flat in good condition.
The ledger records the move without a right-of-use asset or a lease liability, because the short-term exemption applies. Two things land instead: the security deposit of 1,200 as a recoverable asset, and the monthly rent of 600 as an expense from September onward. The commitment of 7,200 is real, but it lives as a disclosure, not as a liability on the face of the balance sheet.
The tip
When you sign a lease, check the term before you decide how to record it. Longer than twelve months, and you put a right-of-use asset and a lease liability on the balance sheet. Twelve months or less with no purchase option, and the exemption lets you keep both off it and expense the rent instead. Either way the deposit is not a cost: it is your money held elsewhere.
Lease accounting, September 2025: monthly rent 600, lease term 12 months, total obligation 7,200. Security deposit 1,200 (recoverable asset). Post-relocation cash: 5,040. New monthly surplus: 185.
Bill is 25. Every episode, we read his personal ledger through accounting eyes. / FY 2025 ledger