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Accounting for leases

month), sales tax should be expensed in that month, except that sales tax for any rent billed at
commencement date should be accounted for as an initial direct costs.

4.2.2.3 Examples – measuring the right-of-use asset

Example 4-1, Example 4-2, Example 4-3, Example 4-4, Example 4-5 and Example 4-6 illustrate the
measurement of a right-of-use asset and a lessee’s accounting for leases.

EXAMPLE 4-1
Measuring the right-of-use asset

Lessee Corp and Lessor Corp execute a 10-year lease of a railcar with the following terms on January 1,
20X9:

□ The lease commencement date is February 1, 20X9.

□ Lessee Corp must pay Lessor Corp the first monthly rental payment of $10,000 upon execution of
the lease.

□ Lessor Corp will pay Lessee Corp a $50,000 cash incentive to enter into the lease payable upon
lease execution.

Lessee Corp incurred $1,000 of initial direct costs, which are payable on February 1, 20X9.

Lessee Corp calculated the initial lease liability as the present value of the remaining unpaid lease
payments discounted using its incremental borrowing rate because the rate implicit in the lease could
not be readily determined; the initial lease liability is $900,000.

How would Lessee Corp measure and record this lease?

Analysis

Lessee Corp would calculate the right-of-use asset as follows:

Initial measurement of lease liability $900,000

Lease payments made to Lessor Corp before the commencement date
(i.e., before the first lease payment) 10,000

Lease incentives received from Lessor Corp (50,000)

Initial direct costs 1,000

Initial measurement of right-of-use asset $861,000

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