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

## Answer

- **(a) Initial lease liability: $102,504.94**
- **(b) Initial right-of-use (ROU) asset: $102,504.94**
- **Governing accounting standard: AASB 16 *Leases*** (the Australian equivalent of IFRS 16 *Leases*).

## Working

The lessee cannot readily determine the interest rate implicit in the lease, so it discounts the lease payments using its incremental borrowing rate of 7% per year (AASB 16 paragraph 26).

The lease liability at commencement is the present value of the five $25,000 payments made in arrears, each discounted at 7%:

| Year (t) | Payment | Discount factor 1/(1.07)^t | Present value |
|---|---|---|---|
| 1 | 25,000 | 0.934579 | 23,364.485981 |
| 2 | 25,000 | 0.873439 | 21,835.968207 |
| 3 | 25,000 | 0.816298 | 20,407.446922 |
| 4 | 25,000 | 0.762895 | 19,072.380301 |
| 5 | 25,000 | 0.712986 | 17,824.654487 |
| **Total** | | | **102,504.935898** |

Equivalently, using the ordinary annuity factor:

PV = 25,000 × (1 − 1.07⁻⁵) / 0.07 = 25,000 × 4.100197 = **$102,504.94** (rounded to the nearest cent).

Because there are no initial direct costs, no lease incentives, no prepaid lease payments, and no restoration/dismantling costs, the right-of-use asset is measured at the same amount as the initial lease liability (AASB 16 paragraphs 23-24). It therefore also equals **$102,504.94**.

## Approach

I computed the lease liability as the sum of the discounted lease payments at the 7% incremental borrowing rate, cross-checking the term-by-term sum against the standard ordinary-annuity factor. Both methods give $102,504.94. Since none of the ROU-asset adjustments (initial direct costs, incentives, prepayments, restoration costs) apply, the ROU asset equals the lease liability. The measurement is governed by AASB 16 *Leases*.

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