Initial measurement of the right-of-use asset

Learning objectives

• Identify the components of the cost of the right-of-use asset: initial lease liability, lease payments made at or before the commencement date less lease incentives received, initial direct costs, estimated costs of dismantling or restoration (IAS 37).L1, L2
• Calculate the initial cost of the right-of-use asset and record the corresponding entry.L2, L3

Normative references

• IFRS 16 §23At the commencement date, the lessee measures the right-of-use asset at cost.
• IFRS 16 §24The cost of the right-of-use asset comprises: (a) the amount of the initial measurement of the lease liability; (b) lease payments made at or before the commencement date, less lease incentives received; (c) initial direct costs incurred by the lessee; (d) an estimate of the costs of dismantling, removing or restoring required by the terms of the lease, unless those costs are incurred to produce inventories.
• IFRS 16 §25The costs described in paragraph 24(d) are included in the cost of the right-of-use asset when the lessee incurs the related obligation. Costs incurred during a period as a consequence of having used the right-of-use asset to produce inventories are accounted for under IAS 2; in both cases, the obligations are recognised and measured under IAS 37.
• IFRS 16 §B43A lease may be negotiated before the underlying asset is available for use; the asset may need to be constructed or redesigned for the lessee, which may then be required to make payments relating to the construction or design.
• IFRS 16 §B44Costs incurred by the lessee relating to the construction or design of the underlying asset are accounted for applying other standards, such as IAS 16; they do not include payments made for the right to use the asset, which are lease payments regardless of their timing.

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

19 questions

• Calvane determines the cost of the right-of-use asset for leased premises. Which items are included in that cost at the commencement 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
• True or false: at the commencement date, the lessee measures the right-of-use asset at the fair value of the underlying asset.L1
• True or false: initial direct costs incurred by the lessee to obtain the lease are included in the cost of the right-of-use asset.L1
• 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
• Fermatis leases a warehouse. The lease requires it to dismantle, at the end of the lease, the racking it installs. Which items are included in the initial cost of its right-of-use asset? (several answers)L2
• Lamivert leases for 10 years land on which it operates a concrete batching plant; the concrete produced is sold as inventory. The lease requires it to restore the ground damaged by the activity: each year of production creates a new restoration obligation. How should the restoration costs incurred in 20X2 as a result of that year's production be treated?L2
• Sorelia signs a lease of a warehouse that the lessor is building for it. During construction, before the commencement date, Sorelia pays the lessor 50,000 for its right to use the future warehouse. How is this payment treated?L2
• Bravelle leases an office floor. At the commencement date, the initial lease liability amounts to {lease_liability}. Before that date, Bravelle paid the lessor a first lease payment of {prepaid_payment} and received from it a lease incentive of {incentive_received}. It incurred initial direct costs of {initial_direct_costs}. The lease requires it to restore the premises when it leaves; the estimate of those costs, measured under IAS 37, is {restoration_cost} (given). Compute the cost of the right-of-use asset.L2
• The haulier Kerval leases a logistics depot fitted with modular loading docks. On the commencement date itself, it pays a lease payment of {commencement_payment} and receives from the lessor a contribution of {incentive_received} to its installation costs, qualifying as a lease incentive. The present value of the lease payments still due at that date is {lease_liability}. Kerval bore {initial_direct_costs} of initial direct costs and will have to dismantle the docks at the end of the lease; the estimate of that dismantling, determined under IAS 37, is {dismantling_cost} (given). What is the initial cost of the right-of-use asset?L2
• 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
• Helvane leases a shop. At the commencement date: lease liability of {lease_liability}; initial direct costs paid in cash of {initial_direct_costs}; contractual obligation to restore the shop, recognised as a provision under IAS 37 for {restoration_provision} (given). No lease payment was made in advance. Record the initial recognition entry.L2
• The Myrtea brewery leases a fermentation hall. At the commencement date, it receives from the lessor a lease incentive of {incentive_received} and pays {initial_direct_costs} of initial direct costs. The lease liability is {lease_liability}. The lease requires the tanks to be dismantled at the end of the lease; the related provision, measured under IAS 37, is {dismantling_provision} (given). Record the initial recognition of the lease by Myrtea.L3
• Tessandre leases a hangar for its drone fleet. Commencement-date file: lease liability 450,000; lease payment made to the lessor one month before the commencement date 25,000; amount reimbursed by the lessor to induce Tessandre to sign (lease incentive) 30,000; commission paid to an intermediary to obtain the lease, qualifying as an initial direct cost 7,000; estimated costs of restoring the hangar required by the lease, measured under IAS 37, 16,000 (given). What is the cost of the right-of-use asset?L3