Under IFRS 16, what is the typical impact on the balance sheet for a lease (not short-term or low-value)?

Under IFRS 16, what is the typical impact on the balance sheet for a lease (not short-term or low-value)?

• A. Right-of-use asset recognised and a lease liability recognised
• B. Only lease liability recognised
• C. Only right-of-use asset recognised
• D. No recognition until cash payment is made

Answer: (A)

Under IFRS 16, a lessee recognizes both a right-of-use asset and a lease liability at the start of the lease because the lessee gains the right to use an asset and incurs an obligation to make lease payments. 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 determinable, otherwise the lessee’s incremental borrowing rate). The right-of-use asset is recorded for the same amount as the lease liability (plus any initial direct costs and adjustments for incentives or prepayments). This means the balance sheet shows an asset representing the use of the asset and a liability representing the future payments, rather than recognizing only one or none. Over time, interest accrues on the liability and lease payments reduce it, while the asset is depreciated. (Exemptions exist for short-term and low-value leases, but for typical leases the dual recognition applies.)

Under IFRS 16, a lessee recognizes both a right-of-use asset and a lease liability at the start of the lease because the lessee gains the right to use an asset and incurs an obligation to make lease payments. 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 determinable, otherwise the lessee’s incremental borrowing rate). The right-of-use asset is recorded for the same amount as the lease liability (plus any initial direct costs and adjustments for incentives or prepayments). This means the balance sheet shows an asset representing the use of the asset and a liability representing the future payments, rather than recognizing only one or none. Over time, interest accrues on the liability and lease payments reduce it, while the asset is depreciated. (Exemptions exist for short-term and low-value leases, but for typical leases the dual recognition applies.)