Measurement of Right of Use Assets
The measurement of right of use assets are summarized below.
Initial Measurement of Right of Use Assets
Based on Appendix A of IFRS 16, a right-of-use asset is defined as an asset that represents a lessee’s right to use an underlying asset for the lease term.
At the commencement date, a lessee shall measure the right-of-use asset at cost and the cost shall comprise of:
- the amount of the initial measurement of the lease liability or the present value of the lease payments,
- any lease payments made at or before the commencement date, less any lease incentives received;
- any initial direct costs incurred by the lessee; and
- an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset for which the lessee has a present obligation.
Lease incentives are payments made by the lessor to the lessee for any reimbursements or assumptions by the lessor on the cost of the lease. This may include the lessor agreeing to cover a particular cost such as the commission to a broker or any other fees.
Meanwhile, the initial direct costs are those incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained.
The unguaranteed residual value does not form part of the cost of right-of-use assets.
Additionally, executory costs, the cost of an ongoing lease agreement, such as utilities, repairs, maintenance, insurance, common area expenses, and taxes paid for the leased asset do not form part of the measurement of the right of use assets. These costs are expensed as incurred.
Subsequent Measurement of Right of Use Assets
Based on IFRS 16 paragraph 29, the lessee shall measure the right-of-use asset by applying the cost model.
To apply a cost model, a lessee shall measure the right-of-use asset at cost:
(a) less any accumulated depreciation and any accumulated impairment losses; and
(b) adjusted for any remeasurement of the lease liability.
A lessee shall apply the depreciation requirements in IAS 16 Property, Plant and Equipment in depreciating the right-of-use asset, subject to the requirements in IFRS 16 paragraph 32.
The lessee shall apply the normal depreciation policy for right of use asset.
IFRS 16 paragraph 32 provides that the lessee shall depreciate the right of use asset over the useful life of the underlying asset under the following conditions:
(a.) the lease transfers ownership of the underlying asset to the lessee at the end of the lease term.
(b.) the lessee is reasonably certain to exercise a purchase option.
If there is no transfer of ownership to the lessee or if the purchase option is unreasonably certain to be exercised, the lessee shall depreciate the right of use asset over the shorter between the useful life of the asset and the lease term.
Other Measurement Models for Right of Use Assets
a. Paragraph 34 provides that if a lessee applies the fair value model in IAS 40 Investment Property to its investment property, the lessee shall also apply that fair value model to right of use assets that meet the definition of investment property in IAS 40.
b. If right-of-use assets relate to a class of property, plant and equipment to which the lessee applies the revaluation model in IAS 16, a lessee may elect to apply that revaluation model to all of the right-of-use assets that relate to that
class of property, plant and equipment.
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