Under IFRS 16, how are leased items initially recognised in the financial statements?

Under IFRS 16, how are leased items initially recognised in the financial statements?

• A. A liability only
• B. An asset reflecting the right to use the asset and a liability at present value of future lease payments
• C. An expense
• D. A revenue

Answer: (B)

Under IFRS 16, a lease creates both a right-to-use asset and a lease liability for the lessee right from the start. The lease liability is measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease if that rate can be readily determined; otherwise, the lessee uses its incremental borrowing rate. The right-of-use asset is recognized at cost, which roughly equals the lease liability plus any initial direct costs, prepayments, or other amounts paid upfront. This setup reflects that the lessee gains access to use the asset for a period and incurs an obligation to make payments over that period, which together are shown on the balance sheet. It’s not an immediate expense or revenue at inception; instead, depreciation of the right-of-use asset and interest on the lease liability are recognized over time.

Under IFRS 16, a lease creates both a right-to-use asset and a lease liability for the lessee right from the start. The lease liability is measured at the present value of the lease payments over the lease term, discounted at the rate implicit in the lease if that rate can be readily determined; otherwise, the lessee uses its incremental borrowing rate. The right-of-use asset is recognized at cost, which roughly equals the lease liability plus any initial direct costs, prepayments, or other amounts paid upfront. This setup reflects that the lessee gains access to use the asset for a period and incurs an obligation to make payments over that period, which together are shown on the balance sheet. It’s not an immediate expense or revenue at inception; instead, depreciation of the right-of-use asset and interest on the lease liability are recognized over time.