# ACC-0005 - AASB 16 Lease Liability and ROU Asset

## Governing accounting standard

**AASB 16 Leases** (Australian Accounting Standards Board 16), which is the Australian equivalent of IFRS 16 Leases. The measurement of the initial lease liability and right-of-use asset is governed by AASB 16 paragraphs 26-28 (lease liability) and paragraph 24 (ROU asset).

## Calculation

The initial lease liability is the present value of the five annual payments of $25,000, each paid in arrears, discounted at the lessee's incremental borrowing rate of 7% per year.

**Formula:**

```
Liability = sum over t = 1..5 of  25,000 / (1.07)^t
```

**Year-by-year breakdown:**

| Year (t) | Payment ($) | Discount factor (1.07)^t | Present value ($) |
|----------|-------------|--------------------------|-------------------|
| 1        | 25,000      | 1.0700000000             | 23,364.49         |
| 2        | 25,000      | 1.1449000000             | 21,835.97         |
| 3        | 25,000      | 1.2250430000             | 20,407.45         |
| 4        | 25,000      | 1.3107960100             | 19,072.38         |
| 5        | 25,000      | 1.4025517307             | 17,824.65         |
| **Total**|             |                          | **102,504.94**    |

Verification using the present-value-of-annuity formula:

```
PV = 25,000 x [1 - (1.07)^-5] / 0.07
   = 25,000 x [1 - 0.712986] / 0.07
   = 25,000 x 0.287014 / 0.07
   = 25,000 x 4.100197
   = 102,504.94
```

Both methods agree.

## Answers

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

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

Because there are no initial direct costs, no lease incentives received, no prepaid lease payments, and no restoration (make-good) obligations, the ROU asset equals the initial lease liability exactly (AASB 16 paragraph 24).

## Approach

Computed the present value of a 5-payment ordinary annuity (payments in arrears) at 7% per annum, summing each discounted cash flow individually and cross-checking with the closed-form annuity formula. Both methods produce $102,504.94 (rounded to the nearest cent). The governing standard is AASB 16 Leases.