ACCA Strategic Business Reporting (SBR) Practice Exam

What does an initial lease receivable include for lessor accounting?

1. Total payment minus commission

2. Present value of future lease payments

3. Annual depreciation of leased asset

4. Future profits from lease agreement

The correct answer is: Present value of future lease payments

The initial lease receivable for lessor accounting is determined by the present value of future lease payments. This reflects the amount that the lessor expects to receive over the lease term, discounted at the appropriate interest rate. The present value approach is fundamental in lease accounting as it takes into account the time value of money—acknowledging that a dollar received in the future is worth less than a dollar received today. Therefore, capturing the future cash flows from lease payments and discounting them to their present value provides a more accurate representation of what the lessor's receivable will be at the start of the lease. This approach aligns with the requirements set forth in accounting standards like IFRS 16 for leases, which mandate that lessors recognize lease payments as receivables calculated by present value, rather than simpler calculations or estimates that could lead to inaccuracies regarding future cash flows or profitability.