Which of the following components constitute the initial measurement of the right-of-use asset for a lease in the lessee's books?

Which of the following components constitute the initial measurement of the right-of-use asset for a lease in the lessee's books?

• A. Lease liability, lease payments made before the measurement date, and direct costs incurred by the lessee
• B. Only the lease liability
• C. The present value of all lease payments to be made
• D. Depreciation for the first year

Answer: (A)

At the start of a lease, the right-of-use asset is measured at its cost, which combines what it costs you to obtain the right to use the asset with the obligations you’ve assumed. That means you take the initial lease liability (the present value of the lease payments due over the term) and add any lease payments you’ve already made before the start date, plus any initial direct costs you incur to arrange the lease. In other words, the asset’s cost reflects both the obligation to make future payments and the upfront costs and prepayments that set up the lease. That’s why the best choice lists the lease liability, the payments made before the measurement date, and the initial direct costs. The other options don’t capture all these components: using only the lease liability ignores prepayments and direct costs; using only the present value of payments would miss the upfront setup costs; and depreciation for the first year is a subsequent accounting entry, not part of the initial measurement.

At the start of a lease, the right-of-use asset is measured at its cost, which combines what it costs you to obtain the right to use the asset with the obligations you’ve assumed. That means you take the initial lease liability (the present value of the lease payments due over the term) and add any lease payments you’ve already made before the start date, plus any initial direct costs you incur to arrange the lease. In other words, the asset’s cost reflects both the obligation to make future payments and the upfront costs and prepayments that set up the lease.

That’s why the best choice lists the lease liability, the payments made before the measurement date, and the initial direct costs. The other options don’t capture all these components: using only the lease liability ignores prepayments and direct costs; using only the present value of payments would miss the upfront setup costs; and depreciation for the first year is a subsequent accounting entry, not part of the initial measurement.