BLM18010 - IFRS 16 Lessee example: Measurement of the right of use asset and lease liability
Lease liability
The initial lease liability is measured at the present value of the remaining nine annual payments, discounted at 5%, which is £710,782.
The lease liability and interest expense over the life of the lease are as follows in the table below:
| Year | Beginning balance (£) | Lease Payment (£) | 5% interest expense (£) | Ending balance (£) |
|---|---|---|---|---|
| 1 | 710,782 | 100,000 | 35,539 | 746,321 |
| 2 | 746,321 | 100,000 | 32,316 | 678,637 |
| 3 | 678,637 | 100,000 | 28,932 | 607,569 |
| 4 | 607,569 | 100,000 | 25,379 | 532,948 |
| 5 | 532,948 | 100,000 | 21,647 | 454,595 |
| 6 | 454,595 | 100,000 | 17,730 | 372,325 |
| 7 | 372,325 | 100,000 | 13,616 | 285,941 |
| 8 | 285,941 | 100,000 | 9,297 | 195,238 |
| 9 | 195,238 | 100,000 | 4,762 | 100,000 |
| 10 | 100,000 | 100,000 | 0 | 0 |
It can be seen that the interest charged each year will reduce each year as the lease liability reduces.
Right of use asset
The right of use asset will initially be the present value of the lease payments (£710,782 above, plus the initial lease payment of £100,000) plus the lease premium of £9,998 and the estimate of future costs to be incurred to restore the building at the end of the lease of £20,000. The carrying value of the ROU asset is as follows:
| Year | Beginning balance (£) | Depreciation charge (£) | Ending balance (£) |
|---|---|---|---|
| 1 | 840,780 | 84,078 | 756,702 |
| 2 | 756,702 | 84,078 | 672,624 |
| 3 | 672,624 | 84,078 | 588,546 |
| 4 | 588,546 | 84,078 | 504,468 |
| 5 | 504,468 | 84,078 | 420,390 |
| 6 | 420,390 | 84,078 | 336,312 |
| 7 | 336,312 | 84,078 | 252,234 |
| 8 | 252,234 | 84,078 | 168,156 |
| 9 | 168,156 | 84,078 | 84,078 |
| 10 | 84,078 | 84,078 | 0 |