Understanding ASC 842 and IFRS 16
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      3. Understanding ASC 842 and IFRS 16

      What is the Calculation for the Initial Recognition of Lease ROU Asset and Liability?

      At the lease commencement date, a lessee shall measure both of the following :

      All leases (finance and operating leases), other than those that qualify for (and for which an entity elected to apply) the short-term recognition exemption, must be recognized as of the lease commencement date on the lessee’s balance sheet. The initial recognition of the lease liability and ROU asset will be the same regardless of lease classification. 

      Lease Liability

      The initial recognition of the Lease Liability = Present Value of Remaining Lease Payments @ Discount Rate 

      • Lease Payments
        •  Lease payments made before or at commencement date should not be included
      • Discount Rate 
        • For a lessee, the discount rate for the lease is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the lessee is required to use its incremental borrowing rate.
        • A lessee that is not a public business entity is permitted to use a risk-free discount rate for the lease, determined using a period comparable with that of the lease term, as an accounting policy election for all leases.
        • The discount rate selected is based on information available at the commencement date

      ROU Asset 

       The ROU Asset is calculated as follows:                      

                          +  Initial Lease Liability 

      + Prepaid Lease Payments

      • Any lease payments made to the lessor on or before the lease commencement date

      +  Any Initial Direct Costs 

      • Costs directly attributable to negotiating and arranging the lease that would not have been incurred had the lease not been executed (e.g., commissions paid, payments made to an existing tenant to incentivize that tenant to terminate its lease)

      -   Any Lease Incentives Received 

      • Include both payments made by the lessor to or on behalf of the lessee and any losses incurred by the lessor as a result of assuming a lessee’s preexisting lease with a third party
      • To the extent that lease incentives received from the lessor are greater than the ROU asset balance (before adjusting for the lease incentives), a lessee should reduce the ROU asset down to zero and recognize the difference as a liability, because it would be inappropriate to recognize a negative ROU asset. This liability should be reversed on a straight-line basis over the lease term and should be recognized as a reduction of lease cost.

      Accounting Guidance Referenced:

      • ASC 842-20-25-1
      • ASC 842-20-30-1
      • ASC 842-20-30-3
      • ASC 842-20-30-5
      • Deloitte A Roadmap to Applying the New Leasing Standard (2020) 8.4.2.2