The periodic increase in the carrying amount of a lease liability reflects the implicit finance cost over the lease term. This growth stems from the application of a discount rate to the outstanding liability balance. For instance, if a company has a lease liability of $100,000 and the applicable discount rate is 5%, the accretion of interest for the first year would be $5,000, increasing the liability balance to $105,000.
Understanding this calculation is essential for accurate financial reporting under lease accounting standards. It directly impacts the expense recognized in the income statement and the liability reported on the balance sheet. Historically, lease obligations were often off-balance sheet, leading to reduced transparency. Current accounting standards require recognition of these obligations, providing a clearer picture of a company’s financial leverage and performance.
