# ACC-0005 - AASB 16 Initial Lease Measurement

## Answer

**(a) Initial lease liability: $102,504.94**

**(b) Initial right-of-use (ROU) asset: $102,504.94**

**Governing standard: AASB 16 *Leases*** (the Australian equivalent of IFRS 16 *Leases*).

## Working

The lease liability is the present value of the five $25,000 payments made in arrears (end of each year), discounted at the lessee's incremental borrowing rate of 7% per year (used because the rate implicit in the lease cannot be readily determined):

$$\text{Liability} = \sum_{t=1}^{5} \frac{25{,}000}{(1.07)^t}$$

| 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 sum = $102,504.935898... which rounds to **$102,504.94**.

Equivalently, using the ordinary-annuity present-value factor:

$$\text{Liability} = 25{,}000 \times \frac{1 - (1.07)^{-5}}{0.07} = 25{,}000 \times 4.100197 = 102{,}504.94$$

Because there are no initial direct costs, no lease incentives, no prepaid lease payments, and no restoration/dismantling costs, the right-of-use asset at commencement equals the initial lease liability:

$$\text{ROU asset} = \text{Lease liability} = \$102{,}504.94$$

## Approach

I discounted each of the five in-arrears payments at 7% and summed them to get the initial lease liability, then set the ROU asset equal to that liability since none of the AASB 16 ROU adjustments (initial direct costs, incentives, prepayments, restoration costs) apply. Values are rounded to the nearest cent only at the final step. The measurement is governed by **AASB 16 *Leases***.

*This is a benchmarking hypothetical, not accounting advice.*