How are the leased asset and lease liability recognised?

How are the leased asset and lease liability recognised?

• A. Leased asset at fair value, depreciated over the lease; Lease liability at present value of minimum lease payments
• B. Leased asset at cost; Lease liability at nominal payments
• C. Leased asset not recognised; Lease liability recognised as expense
• D. Leased asset at fair value; Lease liability at historical cost

Answer: (A)

Under IFRS 16, when a lease starts a lessee recognises two things: a right-of-use asset that represents the holder’s right to use the asset for the lease term, and a lease liability that represents the obligation to make lease payments. The right-of-use asset is recognised at the fair value (or cost-equivalent) and then depreciated over the lease term, reflecting the consumption of economic benefits from using the asset. The lease liability is recognised at the present value of the minimum lease payments, discounted using the rate implicit in the lease or the lessee’s incremental borrowing rate. This structure captures both the asset’s use and the financial obligation to make payments over time. The other options don’t fit this framework. Some suggest the asset is not recognised or measured at nominal/historical terms, or that the liability is not discounted to present value, which would misstate both the asset and the liability relative to the economic arrangement.

Under IFRS 16, when a lease starts a lessee recognises two things: a right-of-use asset that represents the holder’s right to use the asset for the lease term, and a lease liability that represents the obligation to make lease payments. The right-of-use asset is recognised at the fair value (or cost-equivalent) and then depreciated over the lease term, reflecting the consumption of economic benefits from using the asset. The lease liability is recognised at the present value of the minimum lease payments, discounted using the rate implicit in the lease or the lessee’s incremental borrowing rate. This structure captures both the asset’s use and the financial obligation to make payments over time.

The other options don’t fit this framework. Some suggest the asset is not recognised or measured at nominal/historical terms, or that the liability is not discounted to present value, which would misstate both the asset and the liability relative to the economic arrangement.