The contract runs 4 years. The liability does not.

The first disagreement is about time. IFRS 16 does not measure the contract, it measures the lease term, and the lease term is the non-cancellable period plus any extension the lessee is reasonably certain to take. Bill's contract lets him leave on 6 months notice, but not before month 18. So 18 months is what he cannot escape. Everything after that is an option he holds, and an option enters the lease term only if exercising it is reasonably certain.

Bill has been in this city for 6 days. The flat is furnished, so he has put nothing into it that he would lose by leaving. There is no penalty waiting at month 19. Nothing about his situation makes staying reasonably certain, so the lease term is 18 months, not 48. That judgement removes 22,500 before any discounting happens at all.

The second disagreement is about money, and it is much smaller. 18 payments of 750 come to 13,500, but they are not all due today, and IFRS 16 wants the present value. The rate is the one implicit in the lease, and Bill cannot know it: he has no idea what the flat cost his landlord or what return the landlord wants. So he falls back to his own incremental borrowing rate, which is what a bank would charge him to borrow the same amount over the same period with nothing pledged. He is 26, 3 weeks into a permanent contract, with 1,740 net a month. He uses 8 per cent, and discounting at 8 per cent takes 734 out of the number.

22,500 from one estimate, 734 from the other. The rate is the estimate that gets argued about in every audit, and here it moves the answer by 3 per cent of what the term judgement moves it by.

What lands on 1 October is a right-of-use asset of 12,766 and a lease liability of 12,016. The two are not equal, and the 750 difference is the payment Bill made the same day: it sits inside the asset as rent paid in advance rather than reducing a liability that was measured on the 17 payments still outstanding.

The liability then splits: 8,340 falls due within 12 months, 3,676 after. That split is not cosmetic. It is the line anyone reading his balance sheet looks at first.

And the cost is no longer 750 a month. In October Bill charges 709 of depreciation on the asset and 80 of interest on the liability, so his profit and loss carries 789 against the 750 that left his account. The gap closes over the term and reverses at the end. Over 18 months he pays 13,500 and expenses 13,500. Only the timing changed.

One number moves and one does not. Net assets go from 7,013.50 to 7,100, which is September's surplus less 2 months of amortisation, and nothing to do with the lease. Total assets go from 7,013.50 to 19,566. Bill is no wealthier than he was on Monday, and his balance sheet is now 3 times the size. That is what recognising a lease does, and it is why the ratio a lender reads moved while his position did not.