Initial measurement of the lease liability

Learning objectives

• Identify the lease payments included in the lease liability: fixed payments (including in-substance fixed payments) less lease incentives receivable, variable payments that depend on an index or a rate, amounts expected under residual value guarantees, the exercise price of a purchase option that is reasonably certain to be exercised, termination penalties reflected in the lease term.L1, L2
• Determine the discount rate: the interest rate implicit in the lease if it can be readily determined, otherwise the lessee's incremental borrowing rate.L2
• Calculate the present value of the lease payments not yet paid at the commencement date, with payments in advance or in arrears.L2, L3, L4

Normative references

• IFRS 16 §26At the commencement date, the lease liability is measured at the present value of the lease payments not paid at that date. The payments are discounted using the interest rate implicit in the lease if that rate can be readily determined, otherwise the lessee's incremental borrowing rate.
• IFRS 16 §27The lease payments included in the lease liability at the commencement date comprise the payments not yet paid: (a) fixed payments, including in-substance fixed payments (B42), less any lease incentives receivable; (b) variable lease payments that depend on an index or a rate, measured using the index or rate at the commencement date; (c) amounts expected to be payable under residual value guarantees; (d) the exercise price of a purchase option that the lessee is reasonably certain to exercise; (e) payments of penalties for terminating the lease if the lease term reflects the exercise of the termination option.
• IFRS 16 §28Variable lease payments that depend on an index or a rate include, for example, payments linked to a consumer price index, payments linked to a benchmark interest rate or payments that vary to reflect changes in market rental rates.
• IFRS 16 §B42In-substance fixed lease payments are payments that may, in form, contain variability but that, in substance, are unavoidable: payments with no genuine variability (for example, payable only if the asset is proven to be capable of operating, or if an event occurs that has no genuine possibility of not occurring); more than one set of payments of which only one is realistic; or more than one realistic set of payments of which one must be made, in which case the set whose discounted sum is the lowest is used.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

29 questions

• Which rate does the lessee use to discount the lease payments when initially measuring the lease liability?L1
• Vexoria knows the interest rate implicit in its lease, which can be readily determined. It may nevertheless choose to discount the lease liability at its incremental borrowing rate if it finds this more practical.L2
• Mirabel, lessee of a shop, analyses the cash flows provided for in the contract. Which of them are part of the lease payments included in the lease liability at the commencement date? (several answers)L2
• Which of the following operations take place at the commencement date of the lease, and not at the inception date? (several answers)L2
• Belcombe leases a warehouse for 5 years from 1 January 20X1, the commencement date. Annual lease payments of 60,000 are made at the end of each year. The present value of those payments at the incremental borrowing rate of 6.5%, rounded to the nearest euro, is {lease_liability}. No payment is made at or before the commencement date; there are no initial direct costs, no lease incentives and no restoration obligation. Record the entry at the commencement date.L1
• The Aubrive group leases a fleet of delivery vehicles for 3 years; the commencement date is 1 April 20X1. Monthly lease payments of {monthly_payment} are made in arrears, the first on 30 April 20X1. The finance department measures the present value of the lease payments not yet paid at {lease_liability}. There are no initial direct costs, lease incentives or restoration costs to consider. Record the entry on 1 April 20X1.L2
• Corbières leases an office building for 5 years. Annual lease payments of {annual_payment} are payable in advance; the first is paid at the commencement date. The present value of the 4 remaining payments, at the incremental borrowing rate of 4% and rounded to the nearest euro, is {pv_remaining_payments}. There are no initial direct costs, no lease incentives and no restoration costs. Record the entry at the commencement date.L2
• Kerlouan, a coffee roaster, leases a sales kiosk in a railway station for 15 months, through 5 quarters each payable at the start of the quarter; the quarterly payment is {quarterly_payment} and the first is paid on the day the kiosk is made available, the commencement date. The 4 remaining quarterly payments, discounted at the incremental borrowing rate of 2% per quarter, amount to {pv_remaining_payments} (rounded to the nearest euro). No other element enters the cost. Record the entry at the commencement date.L2
• Dunières leases a workshop; lease payments are made in arrears and their present value at the commencement date is {lease_liability}. At the commencement date, Dunières pays an intermediary a commission of {initial_direct_costs}, which, according to the case data, is an initial direct cost of the lease. There are no lease incentives and no restoration costs. Record the entry at the commencement date.L2
• At the commencement date, the lease liability is measured at the present value of the lease payments that are not paid at that date.L1
• Lisandre leases a shop for a fixed payment plus an additional amount equal to 4% of its revenue. The additional amount, reliably estimated in the budget, must be included in the lease liability at the commencement date.L2
• Fontbelle leases a machine tool. The lessor does not provide the information needed to compute the interest rate implicit in the lease, which Fontbelle cannot readily determine. Its incremental borrowing rate is 5%, its weighted average cost of capital 9% and its term deposits earn 2%. Which rate should be used to discount the lease payments at the commencement date?L2
• Hermelin analyses the payments provided for in a warehouse lease in order to measure the lease liability at the commencement date. Which of them are included? (several answers)L2
• Ravenne leases a machine for 5 years; the 5 annual payments of 20,000 are payable in advance, the first being paid at the commencement date. The interest rate implicit in the lease, which can be readily determined, is 5%. The accountant measures the lease liability by discounting the 5 payments, including the one made at the commencement date. What is the error?L2
• Cerdagne leases a press for 4 years. The contract provides that each annual payment is due only if the press proves capable of operating during the year; the press is new, maintained by the lessor, and nothing suggests that it might not operate. How should these payments be treated in measuring the lease liability?L2
• Valdrôme leases a building for 6 years. The annual payment, made at the end of each year, is 100,000 based on the consumer price index at the commencement date, and is then adjusted each year according to changes in that index. The group's economists forecast inflation of 2% per year. Which cash flows does Valdrôme discount to measure the lease liability at the commencement date?L3
• The lease of a rotary press of Imprimerie Sorgues provides that at the end of the third year Sorgues must either buy the press or extend the lease for 2 years; both branches are realistic and one of them must be paid. At the commencement date, at the rate of the lease, the present value of the payments in the purchase branch is 119,100 and that of the extension branch is 112,400. What discounted amount does Sorgues include in the lease liability in respect of these in-substance fixed payments?L4
• Boréal leases a warehouse for {lease_term} years. Fixed annual lease payments of {annual_payment} are made at the end of each year; no payment is made at the commencement date. Since the implicit rate cannot be readily determined, Boréal uses its incremental borrowing rate of {discount_rate}. Compute the lease liability at the commencement date, rounded to the nearest euro.L2
• The Tramontane group leases a fleet of refrigerated trucks for {lease_term} years, for {annual_payment} per year paid at the end of each year. The lessor has provided all the lease data: the interest rate implicit in the lease, which can be readily determined, is {implicit_rate}. Tramontane's incremental borrowing rate is {incremental_rate}. Compute the lease liability at the commencement date, rounded to the nearest euro.L3
• Mistralis leases an office floor for {lease_term} years. Annual lease payments of {annual_payment} are payable in advance, at the start of each year; the first is paid at the commencement date. The incremental borrowing rate, used in the absence of a readily determinable implicit rate, is {discount_rate}. Compute the lease liability at the commencement date, rounded to the nearest euro.L3
• The Agrinord cooperative leases a combine harvester for {lease_term} annual seasons. Each lease payment of {annual_payment} is due at the start of the season, and the first is paid on the day the machine is delivered, which is the commencement date. The interest rate implicit in the lease, known to Agrinord, is {discount_rate}. Determine the initial amount of the lease liability, rounded to the nearest euro.L3
• Cévenole leases a mobile crane for {lease_term} years, for annual lease payments of {annual_payment} made at the end of each year. It guarantees the lessor that the crane will be worth at least {guaranteed_value} at the end of the lease and will pay the difference if its value is lower. At the commencement date, Cévenole expects the crane to be worth {expected_value} at that date. As the implicit rate cannot be readily determined, its incremental borrowing rate of {discount_rate} is used. Compute the lease liability at the commencement date, rounded to the nearest euro.L4
• Pyrène leases an industrial furnace for {lease_term} years: a fixed annual payment of {annual_payment} made at the end of each year and a variable payment of 2% of the sales generated with the furnace, estimated at {variable_estimate} per year. At the end of the lease, Pyrène may buy the furnace for {purchase_price}; the analysis concludes that the exercise of this option is reasonably certain. The implicit rate cannot be readily determined; the incremental borrowing rate of {discount_rate} is used. Compute the lease liability at the commencement date, rounded to the nearest euro.L4
• Ombrelia leases offices for five years. Which of the following items is NOT included in the initial cost of its right-of-use asset?L1
• Nordalys leases a bottling line. The lease provides for {number_of_payments} annual lease payments of {annual_payment}, payable in arrears (at the end of each year). The interest rate implicit in the lease cannot be readily determined; Nordalys's incremental borrowing rate is {borrowing_rate}. Nordalys incurred initial direct costs of {initial_direct_costs}; the estimate of the restoration costs required by the lease, measured under IAS 37, is {restoration_cost} (given). Compute the initial lease liability and then the cost of the right-of-use asset (rounded to the nearest euro).L3
• The Calimer clinic leases an imaging device. It pays {number_of_payments} annual lease payments of {annual_payment} in advance (at the start of each year); the first is paid on the commencement date. The interest rate implicit in the lease, which can be readily determined, is {implicit_rate}. Calimer incurred {initial_direct_costs} of initial direct costs and received from the lessor a lease incentive of {incentive_received} at the commencement date. No restoration is required. Compute the initial lease liability and the cost of the right-of-use asset (rounded to the nearest euro).L3
• The Galmine laboratory leases a spectrometer for a lease term of {lease_term} years, with a purchase option at the end of the lease that it is reasonably certain to exercise: the exercise price was included in the lease liability and the cost of the right-of-use asset, i.e. {rou_cost}, therefore reflects the exercise of the option. The useful life of the spectrometer is {useful_life} years. Straight-line depreciation (method chosen). Compute the annual depreciation charge and the carrying amount at the end of the second year.L2
• The Valmeuse association leases a minibus from 1 January 20X1 (year-end 31 December). The lease provides for {number_of_payments} annual lease payments of {annual_payment} payable in advance each 1 January, the first at the commencement date. The interest rate implicit in the lease, which can be readily determined, is {implicit_rate}. Rounding each amount to the nearest euro, compute the initial lease liability, the interest for 20X2 and the lease liability at 31 December 20X2.L4
• The hotel group Solvène sells a hotel to a property company for {sale_price}, a price equal to the fair value of the hotel, whose carrying amount is {carrying_amount}. The attached IFRS 15 analysis concludes that there is a sale. Solvène leases the hotel back for {lease_term} years for an annual payment of {annual_payment} paid at the end of each year; the discount rate used is {discount_rate} and the corresponding rounded annuity factor is {annuity_factor}. Case assumption: the proportion of the right of use retained is the ratio of the present value of the lease payments to the fair value of the hotel. Determine the lease liability, the right-of-use asset and the gain recognised on the disposal.L4