Which of the following shall a lessee recognize at the commencement date? A. A right-of-use asset B. A lease liability C. Deferred income D. A and B 1. A 2. B 3. C 4. D
The Correct Answer and Explanation is:
The correct answer is D. A and B.
At the commencement date of a lease, a lessee is required to recognize both a right-of-use (ROU) asset and a lease liability. This is in accordance with the new lease accounting standards introduced under IFRS 16 (International Financial Reporting Standards) and ASC 842 (under US GAAP). Let’s break down both elements:
- Right-of-use asset:
- This represents the lessee’s right to use the underlying asset over the lease term.
- The ROU asset is initially recognized at the amount of the lease liability adjusted for any prepayments, initial direct costs, or incentives received.
- It reflects the value of the asset the lessee controls during the lease period.
- Lease liability:
- The lease liability is the present value of the lease payments that the lessee is obligated to make over the lease term.
- This liability is calculated by discounting future lease payments to the commencement date using the lease’s interest rate, or if not readily determinable, the lessee’s incremental borrowing rate.
- The lease liability represents the lessee’s obligation to make lease payments for the right to use the leased asset.
These two components (ROU asset and lease liability) are the primary recognition requirements at the commencement date of the lease. Deferred income (option C) would typically arise in scenarios where a lessor provides incentives or discounts, but it is not a requirement for lessees at the commencement of the lease.
Thus, D (A and B) is the correct choice as it correctly identifies the lessee’s obligations to recognize both the ROU asset and the lease liability.
