# AASB 16 Lease Accounting - Initial Recognition

## Answers

**(a) Initial Lease Liability: $102,504.94**

**(b) Initial Right-of-Use (ROU) Asset: $102,504.94**

**Accounting Standard: AASB 16 Leases**

## Working

The initial lease liability is calculated as the present value of all lease payments, discounted at the lessee's incremental borrowing rate of 7% per annum.

Formula: Liability = Σ(t=1 to 5) of 25,000 / (1.07)^t

| Year | Payment | Discount Factor | Present Value |
|------|---------|-----------------|----------------|
| 1    | $25,000 | 1 / 1.07^1 = 0.934579 | $23,364.49     |
| 2    | $25,000 | 1 / 1.07^2 = 0.873439 | $21,835.97     |
| 3    | $25,000 | 1 / 1.07^3 = 0.816298 | $20,407.45     |
| 4    | $25,000 | 1 / 1.07^4 = 0.762895 | $19,072.38     |
| 5    | $25,000 | 1 / 1.07^5 = 0.712986 | $17,824.65     |
|      |         | **Total**       | **$102,504.94** |

Under AASB 16, the initial ROU asset is measured as equal to the lease liability when there are no initial direct costs, lease incentives, prepaid payments, or restoration obligations. Therefore, both the initial lease liability and the initial ROU asset equal **$102,504.94**.

## References

AASB 16 Leases governs the accounting treatment of leases. Upon initial recognition, a lessee recognizes a lease liability (the present value of lease payments) and a right-of-use asset (which, absent adjustments, equals the lease liability).