ACCA Strategic Business Reporting (SBR) Practice Exam

What includes in the subsequent measurement of the lease liability under IFRS 16?

1. Carrying amount plus cash payments made

2. Carrying amount plus interest minus lease payments

3. Initial value plus depreciation

4. Interest on the original lease amount

The correct answer is: Carrying amount plus interest minus lease payments

In the context of IFRS 16, subsequent measurement of the lease liability involves accounting for the carrying amount of the lease liability, which is adjusted for any interest accrued and reduced by lease payments made during the period. Specifically, the carrying amount of the lease liability reflects the initial measurement plus accrued interest, which is calculated on the outstanding balance of the lease liability. This means that interest expense is recognized as an expense in profit or loss, increasing the liability. As lease payments are made, they reduce the carrying amount of the liability, effectively reflecting the obligation to make payments over the lease term. This systematic accounting approach helps ensure that both the financial position of the lessee and the expense recognition are accurately captured in the financial statements, aligning with the economic realities of lease transactions. Options involving cash payments alone or a simple combination of initial values and depreciation do not accurately capture the dynamics of how liabilities are handled under IFRS 16, particularly the impact of interest accrual and the reduction based on payment. The mention of depreciation is also irrelevant in this context, as it pertains to the right-of-use asset rather than the lease liability itself.