How is the lease liability initially measured under IFRS 16?

The initial measurement of lease liability under IFRS 16 is determined by calculating the present value of future lease payments that are not yet paid. This involves taking into account the expected fixed payments, variable payments that depend on an index or rate, and any amounts expected to be payable under residual value guarantees. The present value calculation is typically discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the entity’s incremental borrowing rate.

This method ensures that the lease liability reflects the time value of money, which is a fundamental principle in financial reporting. By measuring the liability at present value, IFRS 16 aims to represent a more accurate financial obligation on the balance sheet as it relates to the leasing arrangement. This approach also aligns with the overarching goal of providing clearer insights into the financial position of entities that engage in leasing activities.

Options that suggest total lease payments, fair value based on market rates, or historical cost do not adhere to the prescribed accounting standard under IFRS 16 and therefore do not reflect the appropriate basis for establishing the initial measurement of lease liability.