In one sentenceUnder IFRS 16, the lessee records most lease contracts in the financial position, as an asset representing the right to use the asset and a liability for the lease payments.
Simply put
Before the standard, many leases were only a monthly expense. Now the lessee records a right-of-use asset and a lease liability at the present value of the payments, then depreciates the asset and charges interest on the liability.
The standard allows an exemption for short-term contracts (a year or less) and low-value assets, which remain a direct expense.
Worked example
A restaurant leased a shop for five years, and the present value of the lease payments is 430,000 SAR (an assumed figure for illustration).
Dr Right-of-use asset430,000
Cr Lease liabilities430,000
Contract term5 years
Annual depreciation of the right of use = 430,000 ÷ 586,000 SAR
Don't confuse it with
Prepaid expensePaying two months' rent in advance on a short contract is a prepaid expense, while a long contract is recorded as a right of use and a liability.