Under IFRS 16, which statement about the lease liability is correct?

Under IFRS 16, which statement about the lease liability is correct?

• A. It equals the nominal sum of future lease payments
• B. It equals the present value of minimum lease payments
• C. It equals the fair value of the underlying asset
• D. It does not need to be recognised

Answer: (B)

The main idea is that the lease liability is measured at the present value of the future lease payments. Under IFRS 16, you discount those payments over the lease term using the rate implicit in the lease (if readily determinable) or the lessee’s incremental borrowing rate. This reflects the time value of money and gives a true economic obligation today for payments to be made in future periods. It’s not just the nominal sum of payments (which ignores discounting), and it’s not the fair value of the underlying asset (that relates to asset measurement, not the liability). The liability must be recognized at inception, with the corresponding right-of-use asset. So stating that the liability equals the present value of minimum lease payments correctly captures its measurement.

The main idea is that the lease liability is measured at the present value of the future lease payments. Under IFRS 16, you discount those payments over the lease term using the rate implicit in the lease (if readily determinable) or the lessee’s incremental borrowing rate. This reflects the time value of money and gives a true economic obligation today for payments to be made in future periods. It’s not just the nominal sum of payments (which ignores discounting), and it’s not the fair value of the underlying asset (that relates to asset measurement, not the liability). The liability must be recognized at inception, with the corresponding right-of-use asset. So stating that the liability equals the present value of minimum lease payments correctly captures its measurement.