Explain the typical expenses recognized by a lease during lease period

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Question: Explain how the lease liability and a right-of-use asset would be recognized and measured at the lease inception? Explain the typical expenses recognized by a lease during lease period.


As provided in AASB, the lease liability should be recognized at the lease inception at the present value of the minimum lease payments (Bacheva, 2019, p 148(1)). The interest rate of the lease agreement will be considered as the discounting rate for computing present values. The values included in calculating lease liability are:

1. The Upfront amount paid at the beginning of the lease
2. Periodic lease rentpaiyable at the end of each month or quarter or annually (Bacheva, 2019, p 148(1))
3. Amount for purchase option if the lessee opts for purchasing the asset at the end of the lease

The right of use asset should also be recognized at the inception of the lease, and it will be measured by taking into consideration the following amounts:
1. Any amount that the lessee has paid to the lessor less any rebate or incentive or pricediscount that he has received at the beginning or before the lease.
2. Any cost that the lessee has incurred for the purpose of the lease.
3. Estimated cost to be borne by the lessee for the purpose of dismantling the asset already in place.
Expenses recognized by a lease during lease period:
Lessee(Bacheva, 2019, p 148(3)).

The primary expenses that a lessee has to recognize in his books are:
1. Periodic interest payments made to the lessor
2. Depreciation expense at the end of each year for the right-of-use asset
3. Expenses like insurance, repairs and maintenance, service charges related to the use of the right-of-use asset.

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