ACCA Strategic Business Reporting (SBR) Practice Exam

How does a lessor recognize lease payments for an operating lease under IFRS 16?

1. As income on a straight-line basis over the lease term

2. As a one-time income recognition

3. As deferred income until the lease terminates

4. As capital gains from property leasing

The correct answer is: As income on a straight-line basis over the lease term

Under IFRS 16, a lessor recognizes lease payments from an operating lease as income on a straight-line basis over the lease term. This method ensures that the income recognition is consistent and reflects the pattern of the use of the asset by the lessee. By spreading the income evenly over the lease term, the lessor presents a stable and predictable income stream, aligning revenue recognition with the period during which the asset is utilized. Using this approach allows for better comparability and clarity in financial statements, which can be particularly important for users who analyze the financial performance and position of lessors. The straight-line method avoids fluctuations in reported income that could arise from recognizing all lease payments in a single accounting period or in a way that might not accurately reflect the economic activity related to the lease. In contrast, options that involve one-time income recognition, deferred income recognition, or capital gains would not comply with the straight-line requirement set out in IFRS 16 for operating leases. These methods do not align with the principle of matching income recognition with the lease period, which is central to the standard's requirements.