April 12, 2026 | 5 min read
A guide to one of the most misunderstood areas of lease accounting and why getting the split right matters more than you think.
When a company signs a lease, it does not just gain the right to use an asset. It also takes on a financial obligation that must be carefully recorded on the balance sheet. One of the first questions accountants face is a simple but important one: how much of this lease liability is short-term, and how much is long-term?
The answer shapes how investors read your balance sheet, how lenders assess your debt structure, and whether your financial statements tell a clear story about what your company actually owes.
What is a Lease Liability?
Under IFRS 16, when a company enters into a lease, it recognize a right-of-use asset and a corresponding lease liability. The lease liability represents the present value of all future lease payments the company is obligated to make over the lease term.
Think of it like a loan. You borrowed the right to use something, and now you owe a series of payments back. That total obligation needs to be split into two parts on your balance sheet: what you will pay within the next twelve months, and what you will pay after that.
Key principle: The split between current and non-current lease liabilities follows the same logic as any other financial liability. The portion due within twelve months of the reporting date sits in current liabilities. Everything else goes to non-current liabilities.
Short-Term: The Current Portion
The current portion of a lease liability is the amount a company expects to repay within the next twelve months from the balance sheet date. This includes the principal reduction embedded in your upcoming lease payments, not the interest component.
It is worth noting that interest is a separate item. When you make a lease payment, part of it reduces the liability (principal) and part of it covers the financing cost (interest). Only the principal portion counts when determining the current versus non-current split.
| Current liability Due within 12 months |
Non-current liability Due after 12 months |
| The principal reduction on lease payments falling in the next reporting year. Shown under current liabilities on the balance sheet. | The remaining balance of the lease obligation beyond the next twelve months. Shown under non-current liabilities on the balance sheet. |
Long-Term: The Non-Current Portion
The non-current portion is everything else. This is the present value of all lease payments due more than twelve months after the reporting date. For a company with a ten-year office lease, the bulk of the liability will sit here, gradually shifting into the current bucket as time passes.
This is the number that often catches people off guard when they first look at a company’s balance sheet after IFRS 16 came into force. Leases that once lived entirely off the balance sheet suddenly appeared as substantial long-term obligations, and some companies saw their non-current liabilities increase significantly overnight.
Why the Classification Matters
Getting the split right is not just a technical exercise. It has real consequences for how your business is understood from the outside.
Liquidity ratios
Analysts and creditors often calculate the current ratio and quick ratio to assess short-term financial health. Misclassifying a long-term lease liability as current would inflate your short-term obligations and make your liquidity position look weaker than it actually is. The opposite mistake would mask genuine short-term pressure.
Debt covenants
Many loan agreements include covenants tied to leverage or gearing ratios. The classification of lease liabilities can influence whether those ratios stay within the agreed limits. A company with large operating leases needs to understand exactly how its obligations are structured.
Investor perception
Investors read balance sheets quickly. When they see a spike in current liabilities, it triggers scrutiny. Accurate classification gives them confidence that what they are reading reflects economic reality, not a presentation choice.
How to Calculate the Split Correctly
The process is straightforward once you have your lease amortisation schedule in place. For each lease, you prepare a table showing the opening balance, the interest accrual, the cash payment, and the closing balance for each period. The amount by which the liability reduces over the next twelve months is your current portion. The remaining closing balance is non-current.
This is exactly the kind of calculation that a good IFRS 16 Calculator is built to handle automatically, eliminating the manual work and reducing the risk of human error when you are managing a large portfolio of leases.
Practical example: Suppose your lease liability at year-end is £500,000. Based on your amortisation schedule, the principal portion of the next twelve months of payments totals £45,000. You would show £45,000 as a current liability and £455,000 as a non-current liability on your balance sheet.
Common Mistakes to Avoid
Using total payments instead of principal
The current liability is not the full lease payment due in the next year. It is only the principal component. Including interest in the split will overstate your current liability and give a distorted picture of what you truly owe in the near term.
Ignoring lease modifications
When a lease is modified, say a rent reduction is agreed or the term is extended, the liability needs to be remeasured. If you fail to update your amortisation schedule at that point, your current and non-current split will be wrong for every subsequent period.
Treating short-term lease exemptions inconsistently
IFRS 16 allows companies to exempt leases with a term of twelve months or less from full recognition. If you apply this exemption, those leases do not appear on the balance sheet at all. Make sure you are consistent in how you apply the exemption and clearly disclose your policy.
Short-Term Leases as a Separate Category
It is worth distinguishing between the current portion of a long-term lease liability and a genuinely short-term lease. A short-term lease under IFRS 16 is one where the lease term at commencement is twelve months or less. Companies can elect to keep these off the balance sheet entirely, expensing the payments on a straight-line basis instead.
This election is made by class of underlying asset, not lease by lease. So if your company decides that all short-term equipment leases will be expensed, it must apply that policy consistently across all similar leases.
The practical implication is that short-term leases do not create a lease liability at all, while the current portion of a longer lease is simply the near-term slice of a larger obligation that is very much on the balance sheet.
Presentation on the Balance Sheet
Most companies present the current and non-current portions as separate line items, either on the face of the balance sheet or broken out in the notes. Some entities combine lease liabilities with other financial liabilities and provide the detail in the notes instead.
Whatever format you choose, the key is that readers can clearly see how much of the obligation falls due within twelve months and how much sits beyond that. Transparency here builds trust with investors and auditors alike.
The Bigger Picture
Lease liability classification is one of those accounting tasks that looks routine until it goes wrong. A misclassified liability can distort key financial metrics, trigger covenant breaches, and erode confidence in your financial reporting.
Taking the time to build accurate amortisation schedules, apply the current and non-current split consistently, and review your assumptions whenever a lease is modified will pay dividends well beyond the accounting department. It gives everyone who reads your financial statements a clear, honest picture of what your company truly owes and when.
For businesses managing a large number of leases, automation and dedicated lease accounting tools make this process significantly more reliable. But even for smaller portfolios, the underlying logic remains the same: know your payment schedule, separate principal from interest, and split your liability at the twelve-month line.
