What does IFRS 16 require for lessee accounting regarding lease liabilities and right-of-use assets on initial recognition?

What does IFRS 16 require for lessee accounting regarding lease liabilities and right-of-use assets on initial recognition?

• A. Recognize a lease liability at present value of lease payments; recognize a right-of-use asset at cost equal to lease liability plus any initial direct costs and payments; subsequent depreciation and interest.
• B. Recognize only the lease payments as an expense; no asset
• C. Recognize a right-of-use asset separately from the lease liability
• D. Do nothing until lease payments are made in cash

Answer: (A)

Under IFRS 16, at the start of a lease the lessee must recognise both a lease liability and a right-of-use asset. The lease liability is measured as the present value of the lease payments due over the lease term, discounted using the rate implicit in the lease if readily available, or the lessee’s incremental borrowing rate. The right-of-use asset is recognised at an amount equal to the lease liability, plus any payments made to the lessor before commencement, plus any initial direct costs, minus any lease incentives received. This pairing creates both an asset (the right to use the underlying asset) and a corresponding liability. After recognition, the asset is depreciated (or impairment considered) and the liability accrues interest, with lease payments reducing the liability. The other options either omit recognizing the asset and liability, treat the arrangement as an immediate expense, or postpone recognition until cash is paid.

Under IFRS 16, at the start of a lease the lessee must recognise both a lease liability and a right-of-use asset. The lease liability is measured as the present value of the lease payments due over the lease term, discounted using the rate implicit in the lease if readily available, or the lessee’s incremental borrowing rate. The right-of-use asset is recognised at an amount equal to the lease liability, plus any payments made to the lessor before commencement, plus any initial direct costs, minus any lease incentives received. This pairing creates both an asset (the right to use the underlying asset) and a corresponding liability. After recognition, the asset is depreciated (or impairment considered) and the liability accrues interest, with lease payments reducing the liability. The other options either omit recognizing the asset and liability, treat the arrangement as an immediate expense, or postpone recognition until cash is paid.