BLM17035 - IFRS 16 accounting: Initial measurement of right of use asset and lease liability

Initial measurement of right of use asset

The right of use asset is initially measured at cost, comprising of:

• the amount of the initial measurement of the lease liability (as described below);
• any lease payments made at or before commencement date, less any lease incentives received;
• any initial direct costs incurred by the lessee; and
• an estimate of any dismantling, removal or restoration costs required by the lease.

Initial measurement of the lease liability

Initially, the lease liability should be calculated at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if this cannot be readily determined, the lessee’s incremental borrowing rate.

The lease payments included in the measurement of the lease liability comprises the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:

• fixed payments (including any in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that depend on an index or a rate, initially measured using the index or rate at commencement date;
• amounts expected to be payable by the lessee under residual value guarantees;
• the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
• payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.