Lessee Initial Measurement
On the commencement date, the lessee must recognize both an asset and a liability. Getting the numbers right on Day 1 is crucial for everything that follows.
11. Initial Lease Liability
The lease liability is measured at the Present Value (PV) of the lease payments that are not paid at the commencement date.
What is a "Lease Payment"?
Fixed Payments: Minus any lease incentives receivable.
Variable Payments: Only if they depend on an index or rate (e.g., CPI).
Residual Value Guarantees: Amounts the lessee expects to pay.
Purchase Option Price: If the lessee is reasonably certain to exercise it.
Termination Penalties: If the lease term reflects the lessee exercising the option to terminate.
22. Choosing the Discount Rate
Implicit Rate
The rate that causes the PV of (lease payments + unguaranteed residual value) to equal the Fair Value of the asset + direct costs.
Incremental Borrowing Rate (IBR)
The rate the lessee would have to pay to borrow (over a similar term, and with similar security) the funds necessary to obtain an asset of similar value.
33. Right-of-Use (ROU) Asset
The ROU asset is NOT always equal to the lease liability. It consists of more components:
Lessee's Initial Direct Costs
Exam Hack: The Timeline
Always draw a timeline for lease questions. Distinguish between payments made At Commencement (Only ROU, not Liability) and After Commencement (Both).