Question

Justify the “right-of-use” method applied in AASB 16 according to the revised Conceptual Framework for Financial Reporting.

Answer 1

Right of use method applied in AASB 16:

At the commencement date, the lessee shall recognize the right to use the asset and lease liability.

At the commencement date, the lessee shall recognize the right to use the asset at cost. The cost of right to use the asset shall include

• Amount of initial measurement of lease liability.
• Initial direct costs incurred by the lessee.
• Any lease payments made at or before commencement date less any lease incentives received.
• An estimate of costs to be incurred by the lessee in dismantling and removing underlying asset,restoring the site on which it is located, restoring the underlying asset to the condition required by the terms and conditions of the lease ,unless those costs are incurred to produce inventories.

A lessee applies AASB 102 inventories to costs that are incurred during a particular period as a consequence of having used right of use asset to produce inventories  during that period.

After commencement date, the lessee shall measure the right of use asset applying a cost model.

To apply cost model, the lessee shall measure right of use asset at cost less any accumulated depreciation and any accumulated impairment losses and adjusted for any remeasurement of lease liability.

A lessee shall apply AASB 136 Impairment of assets to determine whether right of use asset is impaired and to account for any identified impairment losses.

If right of use asset relate to a class of property,plant and equipment to which lessee applies revaluation model as per AASBY116, a lessee may apply revaluation model to all the right of use assets that relate to that class of property,plant and equipment.

If lessee applies fair value method under AASB 140 Investment property to its investment property, the lessee shall also apply the fair value model to the right of use assets that meet the definition of Investment property in AASB 140.