ACCA SBR ^INT Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Further Guidance on Lease accounting - Notes ^{11 / 11}

Some further guidance on measuring Right to use Assets

1. Discount rate

   The lessee uses the discount rate the interest rate implicit in the lease - if this rate cannot be readily determined, the lessee should use its incremental borrowing rate (for similar amount, term & security)

2. Restoration costs

   This should be included in the initial measurement of the right-of-use asset and as a provision. This corresponds to the accounting for restoration costs in IAS 16 Property, Plant and Equipment.

   If the expected restoration costs change - then the right-of-use asset and provision is changed

3. Initial direct costs

   These are incremental costs that would not have been incurred if a lease had not been obtained. e.g.  commissions or some payments made to existing tenants to obtain the lease. 

   All initial direct costs are included in the initial measurement of the right-of-use asset.

4. Subsequent measurement

   The lease liability is measured in subsequent periods using the effective interest rate method. 
   The right-of-use asset is depreciated on a straight-line basis or another systematic basis that is more representative of the pattern in which the entity expects to consume the right-of-use asset. 

   The lessee must also apply the impairment requirements in IAS 36,‘Impairment of assets’, to the right-of-use asset.

   Using straight-line depreciation (for the asset) and the effective interest rate (for the lease liability) will mean higher charges at the start of the lease and less at the end (‘frontloading’)

   But this might not properly reflect the economic characteristics of a lease contract (especially for 'operating leases'. 

   It also means the carrying amount of the right-of-use asset and the lease liability won't be equal in subsequent periods. The right-of-use asset will, in general, be lower than the carrying amount of the lease liability.

When should the lease liability be reassessed?

(only if the change in cash flows is based on contractual clauses that have been part of the contract since inception) otherwise it's a modification not a reassessment