How to compute right-to-use asset

Initial measurement of the right-of-use asset

At the commencement date, a lessee should recognise a right-of-use asset and a lease liability.

• At the commencement date, a lessee should measure the right-of-use asset at cost.
• The cost of the right-of-use asset should comprise:

• the amount of the initial measurement of the lease liability
• 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, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period.

Obligation incurred for such costs

• A lessee should recognise the costs as part of the cost of the right-of-use asset when it incurs an obligation for those costs.
• A lessee applies Ind AS 2, Inventories, to costs that are incurred during a particular period as a consequence of having used the right-of-use asset to produce inventories during that period.
• The obligations for such costs accounted for applying Ind AS 116 or Ind AS 2 are recognised and measured applying Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets.

Initial measurement of the lease liability

• At the commencement date, a lessee should measure the lease liability at the present value of the lease payments that are not paid at that date.
• The lease payments should be discounted using the interest rate implicit in the lease, if that rate can be readily determined.
• If that rate cannot be readily determined, the lessee should use the lessee’s incremental borrowing rate.

Components of lease payments

At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:

1. fixed payments (including in-substance fixed payments), less any lease incentives receivable;
2. variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date
3. amounts expected to be payable by the lessee under residual value guarantees;
4. the exercise price of a purchase option if the lessee is reasonably certain to exercise that option
5. payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
6. Variable lease payments include, for example, payments linked to a consumer price index, payments linked to a benchmark interest rate (such as LIBOR) or payments that vary to reflect changes in market rental rates.

Subsequent measurement of the right-of-use asset

• After the commencement date, a lessee should measure the right-of-use asset applying a cost model, unless it applies the measurement model

Cost model

To apply a cost model, a lessee should measure the right-of-use asset at cost:

• less any accumulated depreciation and any accumulated impairment losses; and
• adjusted for any remeasurement of the lease liability

• A lessee should apply the depreciation requirements in Ind AS 16, Property, Plant and Equipment, in depreciating the right-of-use asset

Depreciation of right-to-use asset

• If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a purchase option, the lessee should depreciate the right-of-use asset from the commencement date to the end of the useful life of the underlying asset.
• Otherwise, the lessee should depreciate the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.

Impairment of assets

• A lessee should apply Ind AS 36, Impairment of Assets, to determine whether the right-of-use asset is impaired and to account for any impairment loss identified.

Other measurement models

• If right-of-use assets relate to a class of property, plant and equipment to which the lessee applies the revaluation model in Ind AS 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.

Subsequent measurement of the lease liability

After the commencement date, a lessee should measure the lease liability by:

• increasing the carrying amount to reflect interest on the lease liability;
• reducing the carrying amount to reflect the lease payments made; and
• remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments

• Interest on the lease liability in each period during the lease term should be the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability.
• The periodic rate of interest is the discount rate described in paragraph 26, or if applicable the revised discount rate

Recognise in profit or loss

After the commencement date, a lessee should recognise in profit or loss, unless the costs are included in the carrying amount of another asset applying other applicable Standards, both:

1. interest on the lease liability; and
   1. variable lease payments not included in the measurement of the lease liability in the period in which the event or condition that triggers those payments occurs.

Reassessment of the lease liability

• After the commencement date, a lessee should remeasure the lease liability to reflect changes to the lease payments.
• A lessee should recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
• However, if the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, a lessee should recognise any remaining amount of the remeasurement in profit or loss.

Revised discount rate

• A lessee should remeasure the lease liability by discounting the revised lease payments using a revised discount rate, if either:
• there is a change in the lease term a lessee should determine the revised lease payments on the basis of the revised lease term; or
• there is a change in the assessment of an option to purchase the underlying asset, in the context of a purchase option, a lessee should determine the revised lease payments to reflect the change in amounts payable under the purchase option.
• A lessee should determine the revised discount rate as the interest rate implicit in the lease for the remainder of the lease term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the date of reassessment, if the interest rate implicit in the lease cannot be readily determined.

Remeasure lease liability

A lessee should remeasure the lease liability by discounting the revised lease payments, if either:

• there is a change in the amounts expected to be payable under a residual value guarantee. A lessee should determine the revised lease payments to reflect the change in amounts expected to be payable under the residual value guarantee.

• there is a change in future lease payments resulting from a change in an index or a rate used to determine those payments, including for example a change to reflect changes in market rental rates following a market rent review. The lessee should remeasure the lease liability to reflect those revised lease payments only when there is a change in the cash flows (ie when the adjustment to the lease payments takes effect). A lessee should determine the revised lease payments for the remainder of the lease term based on the revised contractual payments.

• A lessee should use an unchanged discount rate, unless the change in lease payments results from a change in floating interest rates. In that case, the lessee should use a revised discount rate that reflects changes in the interest rate.