Question

Please discuss why would the carrying amount of a leased asset typically reduce more quickly than the carrying amount of a lease liability?

Answer 1

As per IFRS 16, the carrying amount of the lease asset would typically reduce more quickly than the carrying amount of the lease liability.

This is because, in each period of the lease, the lease asset is depreciated on a straight-line basis(SLM) and the lease liability is:

(a) reduced by the amount of
lease payments made and

(b) increased by the interest—

Hence the carrying amount of lease asset would reduce over the life of the lease more quickly than lease liability.

Although the amounts of the lease asset and lease liability are the same at the start and end of the lease, the carrying amount of the asset would typically be lower than that of the liability throughout the lease term.
This effect is expected for each individual lease, it is also expected when considering the ‘portfolio effect’ of companies holding a mix of leases with different remaining lease terms.