What is the accounting treatment for a lessee at the commencement of a lease under IFRS 16?

At the commencement of a lease under IFRS 16, the lessee recognizes a right-of-use (ROU) asset and a lease liability. This treatment reflects the lessee's right to use the underlying asset for the lease term and the obligation to make lease payments.

The correct accounting treatment is to debit the right-of-use asset and credit the lease liability. The ROU asset represents the value of the asset that the lessee can use, and it is recorded at the amount of the lease liability plus any initial direct costs incurred. The lease liability, on the other hand, is recorded at the present value of the future lease payments that the lessee is obliged to make under the lease contract.

This method aligns with the principle under IFRS 16, which emphasizes a single lessee accounting model where leases are treated similarly to financing arrangements, whereby an asset is recognized for the right to use the leasing asset and a liability is recognized reflecting the obligation to make lease payments.