IFRS 16 / AASB 16 income statement calculations: A practical guide

Under IFRS 16 and AASB 16, the operating lease rental expense disappears from the income statement entirely. In its place, the lessee recognises two separate charges: depreciation of the right-of-use (ROU) asset, which sits above the EBITDA line as an operating cost, and interest expense on the lease liability, which sits below the EBITDA line as a finance cost. For a 36-month lease with monthly payments of AUD $10,000 at a 5% incremental borrowing rate (IBR), that single rental line becomes depreciation of ~$9,321 per month (constant) and interest that starts at ~$1,326 in month one and decreases each period as the liability amortises. This guide walks through the calculation sequence step by step, with worked figures sourced directly from LOIS system output.

Updated June 2026.

For background on the standard, our complete guide to IFRS 16 and AASB 16 covers the full lessee accounting model. For the ROU asset specifically, see our plain-English guide to right-of-use assets. This post focuses on the income statement calculations that flow from those two recognised balances each reporting period.

What changed for the income statement under IFRS 16 and AASB 16

Under IFRS 16 and AASB 16, the single operating lease rental expense is replaced by two charges that sit at different points in the income statement: depreciation of the right-of-use asset above the EBITDA line and interest expense on the lease liability below it. Before IFRS 16, the full rental payment reduced EBITDA. Under IFRS 16, only the depreciation component does; interest sits alongside other financing costs. LOIS applies this model to every lease in a register simultaneously, producing the correct split each period without manual recalculation.

AASB 16 is the Australian equivalent of IFRS 16, issued by the Australian Accounting Standards Board (aasb.gov.au), and is mandatory for Australian entities. New Zealand for-profit entities apply NZ IFRS 16, issued by the External Reporting Board (xrb.govt.nz). Both implement the same lessee accounting model, and the income statement calculations are identical.

The two charges the income statement now carries are:

• Depreciation of the ROU asset: an operating charge, recognised above EBITDA alongside depreciation of owned assets. It is calculated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset.
• Interest expense on the lease liability: a finance charge, recognised below EBITDA. It is calculated using the effective interest method: opening liability multiplied by the periodic discount rate. This charge decreases each period as the liability reduces through cash payments.

The cash payment to the lessor does not appear in the income statement at all. It reduces the lease liability on the balance sheet. This accounting mechanism separates the interest component (P&L) from the principal repayment (balance sheet), and it is what makes manual calculation so error-prone at scale.

How to calculate the two P&L charges

IFRS 16 and AASB 16 require five calculation steps to establish and then maintain the two income statement charges each period: present-value the future payments at the IBR to set the lease liability, derive the ROU asset, then each period calculate interest on the opening liability, straight-line the depreciation, and reduce the liability by the cash payment less interest. LOIS runs each step automatically for every lease in the register. All figures below are from LOIS system output for a sample lease: AUD $10,000/month, 36-month term commencing 1 June 2026, IBR of 5% per annum.

The worked example below shows this sequence applied to the first three months of the LOIS sample lease, using exact LOIS system figures.

Source: LOIS system output (Sample Lease AASB 16, Live Demo Lessee, 36-month term commencing 01/06/2026, IBR 5%). Over three months, the total P&L impact is $31,837.66 against cash payments of $30,000.00. The difference ($1,837.66) between total P&L expense and cash paid reflects the non-cash nature of depreciation: the $27,964.53 depreciation charge has no cash impact, while the $3,873.13 interest expense is the finance cost recognised over the period.

Why EBITDA increases under IFRS 16 and AASB 16

Under IFRS 16 and AASB 16, EBITDA increases because the interest component of the former rental expense moves below the EBITDA line as a finance cost, while only the depreciation charge remains above it. For the LOIS sample lease, what was a flat $10,000 operating cost becomes $9,321.51 of depreciation above EBITDA and $1,326.43 of interest below it in month one, raising EBITDA by $1,326.43 that period.

The EBITDA increase scales with portfolio size. For an organisation with 200 leases each averaging $10,000 per month, the aggregate EBITDA uplift from IFRS 16 could be significant, and materially different from what the business was reporting under the old IAS 17 operating lease model. This is a presentation change, not an economic one, but it is one that finance teams regularly need to explain to boards and external stakeholders.

Journal entries for the first month

A new lease under IFRS 16 and AASB 16 requires four journal entries in its first period: one commencement journal that creates the ROU asset and lease liability on the balance sheet, and three recurring monthly journals for interest expense, depreciation, and the cash payment. LOIS generates all four automatically, coded to the correct GL accounts, with no manual entry required. The table below shows the exact LOIS GL codes and amounts for June 2026.

Note that the cash payment journal debits the lease liability (reducing it by $10,000) and credits cash. The lease liability at end of June is therefore: $335,574.35 + $1,326.43 (interest accrued) − $10,000.00 (payment) = $326,900.78. Interest expense and depreciation charge are the only two lines that affect the income statement. The commencement and payment journals are purely balance sheet movements.

CPI adjustments and their income statement impact

Under IFRS 16 and AASB 16, a CPI-linked rent increase triggers a lease liability remeasurement under paragraph 42(b), but only on the date the new payment amount first becomes payable, not when CPI is announced. The LOIS platform processes this remeasurement on the correct effective date, adjusting both the lease liability and the ROU asset with no immediate income statement impact. The P&L effect arrives from the following period as a higher depreciation charge, because the ROU asset carrying value has increased. For a detailed walkthrough of the remeasurement mechanics, see our post on CPI adjustments under IFRS 16.

The table below shows the LOIS output for a 3% CPI adjustment applied to the sample lease on 1 June 2027 (the one-year anniversary), raising the monthly payment from $10,000 to $10,300.

Source: LOIS system output (Amort_with_CPI_change.xlsx). The depreciation increase from $9,321.51 to $9,607.92 reflects the higher ROU asset cost after remeasurement. The interest expense continues its natural decline as the liability amortises. There is no separate P&L line for the CPI adjustment itself: it is absorbed into the asset base and flows through depreciation over the remaining term.

Handling complexity at scale: modifications, multiple leases, and portfolio reporting

The five-step calculation above is straightforward for a single lease, but IFRS 16 and AASB 16 portfolios rarely stay simple: modifications, CPI cycles, and the current/non-current liability split each add calculation complexity that compounds across every active lease every reporting period. LOIS handles this by maintaining a live amortisation schedule for each lease and recalculating the full income statement impact as changes are entered. A CA ANZ post-implementation review found that over 50% of Australian and New Zealand Chartered Accountants reported significant ongoing compliance complexity from IFRS 16, and the income statement is where much of that complexity lands each month.

Several factors make the calculation harder in practice:

• Lease modifications. Every extension, partial termination, or rent review remeasures the lease liability and adjusts the ROU asset. Each remeasurement resets the amortisation schedule and changes the forward interest expense profile. A portfolio receiving ten modifications per month generates ten separate recalculations, each affecting both the balance sheet and the P&L going forward.
• CPI and rent review cycles. Leases with annual CPI reviews create a cluster of remeasurement events at the same time each year. Processing them correctly (on the effective date, using the original IBR) requires both timing discipline and accurate carry-forward of each lease's commencement-date discount rate.
• Current/non-current liability split. The balance sheet requires the lease liability to be split between the amount due within 12 months (current) and the remainder (non-current). This split must be recalculated at each reporting date and flows from the amortisation schedule for every lease.
• Aggregated P&L reporting. Boards and auditors require total depreciation, total interest, and total cash flows at portfolio level. Assembling these totals from individual lease schedules in spreadsheets, while keeping them reconciled to the GL, is where most manual errors originate.

For organisations managing 200 or more leases, running these calculations in spreadsheets across periods creates reconciliation risk that accumulates month to month. Our guide to fixing the IFRS 16 month-end close covers the specific bottlenecks in detail and what resolves them.

How software removes the monthly calculation burden

LOIS automates the full IFRS 16 and AASB 16 income statement calculation for every lease in the register simultaneously, recalculating interest expense and depreciation on each active lease, processing any modifications entered during the period, and generating a complete set of GL journal entries coded to the correct accounts and ready for posting without manual intervention. The three-month income statement summary below is the exact output LOIS produces from its IFRS 16 Report function.

Source: LOIS IFRS 16 Report, period ending 31 August 2026. At portfolio scale, LOIS generates this output across every lease simultaneously, reconciles the totals to the general ledger, and flags any discrepancies before journals are posted. The result is an income statement that is complete, auditable, and ready to post within hours rather than days.

For organisations that want the calculations handled end to end rather than processed in-house, LOIS also offers a managed service for lease accounting, where CA-qualified specialists run the full monthly cycle and deliver audit-ready output. Whether you run the platform yourself or with LOIS's team, the calculation logic is the same: automated, controlled, and reconciled to the GL.

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