Theory and Practice
While prepaid expense management is not appropriate for payments included in the lease liability, certain boundary conditions must be observed:
Payments made before lease commencement are accounted for by adjusting the initial measurement of the ROU asset, not as prepaid expenses (IASB, 2016; FASB, 2016b).
Non‑lease components that are accounted for separately from the lease—such as service components where separation is elected—may still require prepaid or accrued expense treatment if cash timing differs from service consumption.
Variable payments not included in the lease liability, such as usage‑based payments, are recognized as expenses in the period in which the triggering event occurs and may still follow traditional accrual logic.
These exceptions do not undermine the general principle that, once a lease is recognized on the balance sheet, prepaid expense accounting is not the mechanism used to achieve period matching for lease payments.