How is a lease recognised at inception?

How is a lease recognised at inception?

• A. The right-of-use asset and the lease liability are recognised
• B. Only the lease liability is recognised
• C. Only the right-of-use asset is recognised
• D. No recognition until payments begin

Answer: (A)

When a lease begins, you bring both a right-of-use asset and a lease liability onto the balance sheet. The lease liability is the present value of the lease payments due over the lease term, discounted at the rate implicit in the lease (if readily determinable) or the lessee’s incremental borrowing rate. The right-of-use asset is recognized at cost and equals the lease liability plus any initial direct costs and prepayments, minus any lease incentives received. This setup reflects the lessee’s right to use the asset and the obligation to make lease payments from day one of the lease. Over time, the asset is depreciated and the liability accrues interest while payments reduce the liability. In short, both the asset and the liability are recognized at inception.

When a lease begins, you bring both a right-of-use asset and a lease liability onto the balance sheet. The lease liability is the present value of the lease payments due over the lease term, discounted at the rate implicit in the lease (if readily determinable) or the lessee’s incremental borrowing rate. The right-of-use asset is recognized at cost and equals the lease liability plus any initial direct costs and prepayments, minus any lease incentives received. This setup reflects the lessee’s right to use the asset and the obligation to make lease payments from day one of the lease. Over time, the asset is depreciated and the liability accrues interest while payments reduce the liability. In short, both the asset and the liability are recognized at inception.