# ACC-0005 - Initial measurement of a 5-year lease under AASB 16

This is a benchmarking hypothetical, not accounting advice. Figures are as at FY2025-26.

## 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).

## Inputs

| Item | Value |
| --- | --- |
| Annual lease payment (in arrears) | $25,000 |
| Number of payments | 5 (end of each year) |
| Discount rate (incremental borrowing rate) | 7% per year |
| Initial direct costs | $0 |
| Lease incentives | $0 |
| Prepaid lease payments | $0 |
| Restoration / make-good costs | $0 |

The interest rate implicit in the lease cannot be readily determined, so the lessee uses its incremental borrowing rate of 7% as the discount rate (AASB 16 paragraph 26).

## (a) Initial lease liability

At the commencement date the lease liability is measured at the present value of the lease payments not yet paid, discounted at 7% (AASB 16 paragraphs 26-27). With five equal payments of $25,000 in arrears:

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

Discounting each payment:

| Year (t) | Payment | Discount factor 1 / (1.07)^t | Present value |
| ---: | ---: | ---: | ---: |
| 1 | $25,000 | 0.9345794393 | $23,364.4859813 |
| 2 | $25,000 | 0.8734387283 | $21,835.9682068 |
| 3 | $25,000 | 0.8162978769 | $20,407.4469223 |
| 4 | $25,000 | 0.7628952120 | $19,072.3803012 |
| 5 | $25,000 | 0.7129861795 | $17,824.6544871 |
| | | **Total** | **$102,504.9358987** |

Cross-check using the ordinary-annuity present-value factor:

$$\text{PV factor} = \frac{1 - (1.07)^{-5}}{0.07} = 4.1001974359$$

$$\text{Liability} = 25{,}000 \times 4.1001974359 = 102{,}504.9358987$$

Rounded to the nearest cent:

**Initial lease liability = $102,504.94**

## (b) Initial right-of-use asset

At the commencement date the ROU asset is measured at cost, which comprises (AASB 16 paragraph 24):

1. the amount of the initial measurement of the lease liability, plus
2. any lease payments made at or before commencement, less any lease incentives received, plus
3. any initial direct costs, plus
4. an estimate of dismantling/removal/restoration costs.

Here items 2, 3, and 4 are all zero (no prepaid payments, no incentives, no initial direct costs, no restoration costs). The ROU asset therefore equals the initial lease liability:

**Initial right-of-use asset = $102,504.94**

## Governing standard

The measurement is governed by **AASB 16 *Leases*** (the Australian Accounting Standard, equivalent to IFRS 16): liability at the present value of lease payments discounted at the incremental borrowing rate (paragraphs 26-27), and the ROU asset at cost (paragraph 24).

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### Note on approach

The task is a self-contained present-value calculation, so no external data or tools beyond arithmetic were needed. I discounted each of the five $25,000 payments at 7% over years 1 to 5 and summed them, then cross-checked the figure against the closed-form ordinary-annuity factor (1 - 1.07^-5) / 0.07 = 4.1001974359; both methods agree at $102,504.9358987, which rounds to $102,504.94. Because every cost adjustment in AASB 16 paragraph 24 (prepaid payments, incentives, initial direct costs, restoration) is zero, the right-of-use asset equals the lease liability, as the prompt states. Calculations were carried at full precision and rounded only at the final step.