ACCA Strategic Business Reporting (SBR) Practice Exam

What does the right of use asset consist of at initial measurement?

1. Only the lease liability

2. Initial cost of the lease liability and direct costs

3. Initial measurement of lease liability, direct costs, and incentives

4. The present value of lease payments only

The correct answer is: Initial measurement of lease liability, direct costs, and incentives

The right of use asset is a key component in lease accounting under the relevant accounting standards, specifically IFRS 16. At initial measurement, the right of use asset is determined by taking the initial measurement of the lease liability, adding any direct costs incurred in obtaining the lease and considering any lease incentives received. The lease liability represents the present value of future lease payments that the lessee is obligated to make. However, it does not capture all costs related to securing the lease, which is where direct costs come into play. Direct costs are expenses that are directly attributable to negotiating and arranging the lease, such as legal fees or commissions. Lease incentives, such as rent-free periods or reduced payments, are also factored in to reflect the overall economic effect of the lease in the asset's measurement. This comprehensive approach is crucial as it aligns with the accounting principles of recognizing all relevant costs that relate to the right of use asset at the time of the initial measurement, ensuring that the asset reflects not just the obligation under the lease but also the direct costs incurred and the economic impact of any incentives. This treatment provides a clearer picture of the economic value of the right of use asset to the lessee.