Lease liability refers to the amount a company owes to a lessor, according to the agreed contract terms of a lease arrangement. The lease liability is recorded when a company enters into a lease, and it represents the present value of the future lease payments that the company is obligated to pay throughout the contract period of the lease. This is commonly done under the accounting standards such as IFRS 16 or ASC 842.
For example, if a company leases office equipment, the agreed payments over the lease period are recognized as financial liabilities on the balance sheet along with corresponding 'Right to Use' assets signifying the leased item. This ensures the financial statements reflect the true nature of lease obligations and usage of resources.
Future cash outflows related to the lease are often adjusted with interest costs, modifying the liability over time as payments are made. Such categorizations help in financial clarity and improve understanding of the company's financial obligations.
For instance, 'The company reported an increase in its lease liability due to new equipment leases under IFRS 16 standards.'