ACCA Strategic Business Reporting (SBR) Practice Exam

What type of costs are included in the calculation of a right of use asset?

1. Only the cost of the physical asset

2. Payments made after the commencement date

3. Initial direct costs and estimated removal costs

4. All costs related to the acquisition of the asset

The correct answer is: Initial direct costs and estimated removal costs

The calculation of a right of use asset under lease accounting standards, such as IFRS 16, typically includes not just the physical asset's cost but also other specific costs linked to obtaining the right to use that asset. Choosing initial direct costs and estimated removal costs as part of the right of use asset calculation is correct because these components reflect the total expenditure required to make the asset operational and compliant with the terms of the lease. Initial direct costs are those incremental costs that are directly attributable to negotiating and arranging a lease, such as legal fees or commissions. Estimated removal costs refer to the expense anticipated for restoring the asset to its original condition at the end of the lease term, which is a consideration under the lease liability. While considering the overall costs of the right of use asset, only accounting for physical asset costs or payments made post-commencement ignores essential aspects of valuing the lease comprehensively. It’s vital in lease accounting to recognize these initial direct costs and future obligations, as they provide the necessary financial picture of the lease's impact on the organization's assets and liabilities.