# ACC-0005 — Initial lease liability and right-of-use asset (AASB 16)

## Approach

The lessee discounts five end-of-year payments of $25,000 at the incremental borrowing rate of 7% per year. With no initial direct costs, incentives, prepayments, or restoration costs, the initial right-of-use asset equals the initial lease liability. Amounts are rounded to the nearest cent.

## Accounting standard

**AASB 16** *Leases* governs recognition and measurement of the lease liability and the right-of-use asset for this lessee.

## Working

Present value of lease payments (payments in arrears, ordinary annuity):

\[
\text{PV} = \sum_{t=1}^{5} \frac{25{,}000}{(1.07)^t}
\]

Equivalently:

\[
\text{PV} = 25{,}000 \times \frac{1 - (1.07)^{-5}}{0.07}
\]

| Year \(t\) | Payment | Discount factor \(1/(1.07)^t\) | Present value |
|------------|---------|--------------------------------|---------------|
| 1 | 25,000 | 0.934579… | 23,364.49 |
| 2 | 25,000 | 0.873439… | 21,835.97 |
| 3 | 25,000 | 0.816298… | 20,407.45 |
| 4 | 25,000 | 0.762895… | 19,072.38 |
| 5 | 25,000 | 0.712986… | 17,824.65 |
| **Total** | | | **102,504.94** |

(Unrounded total: $102,504.94 when rounded to the nearest cent.)

## Answers

| Item | Amount (AUD) |
|------|----------------|
| **(a) Initial lease liability** | **$102,504.94** |
| **(b) Initial right-of-use asset** | **$102,504.94** |

With no adjusting items, the initial ROU asset equals the initial lease liability under AASB 16.