need to know / leases - project update - BDO International

LEASES - A PROJECT UPDATE
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LESSEE ACCOUNTING
Initial recognition and measurement
At the date of commencement of a lease, a lessee would recognise and measure a right-of-use asset and a liability to make
lease payments. The date of commencement of a lease is the date on which the lessor makes the underlying asset available
for use by the lessee.
The date of commencement of a lease may be different from the date of inception of the lease, which is the earlier of the
date of the lease agreement and the date of commitment by the lessor and lessee to the principal terms of the lease; this
can be earlier than the commencement date. In the 2010 ED, the IASB made a distinction between the recognition date
(commencement of lease) and the date on which the lease assets and liabilities would be measured, which was the date of
inception of the lease. This was similar to existing guidance in IAS 17. This approach was eliminated during redeliberations
by the boards. Application guidance is to be included to cover costs incurred, and lease payments made, by lessees after the
date of inception of a lease but before its commencement date. In addition, a lease might meet the definition of an onerous
contract between its date of inception and date of commencement, meaning that the costs of the lease are greater than the
economic benefits to be received from the use of the leased asset. In those cases, it would be accounted for in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets until the date of commencement.
A lessee would measure its obligation to make lease payments at the present value of the lease payments, discounted using
the lessee’s incremental borrowing rate or, if it can be readily determined, the rate the lessor charges the lessee.
The lessee’s incremental borrowing rate is the rate of interest that, at the date of inception of the lease, the lessee would
have to pay to borrow over a similar term, and with a similar security, the funds necessary to purchase a similar underlying
asset.
The right-of-use asset is measured at the amount of the obligation to make lease payments, plus any initial direct costs
incurred by the lessee. Initial direct costs are those costs that are directly attributable to negotiating and arranging a lease,
that would not have been incurred had the lease transaction not been entered into.
Any lease incentives provided by the lessor to the lessee would be deducted from the initial measurement of the right-ofuse
asset. Where a right-of-use asset is amortised on a straight line basis to a nil residual value, the accounting result for the
incentive will be the same as under current guidance in SIC-15 Operating Leases – Incentives, but it will be different where
amortisation is not on a straight line basis.