Question

Use FASB codification references and citation to answer question 3 and 4

AaBbCcDdEe AaBbCcDdEe AaBbCcDc Normal No Spacing Heading 1 Question 3 (5 points) What is included in the measurement of (1) the lease liability; and (2) the right-of-use asset? Question 4 (6 points) Besides the non-cancelable term of the lease, what other considerations determine the "lease term"?

Answer 1

Lease liability
A lessee’s obligation to make the lease payments arising from a lease, measured on a discounted basis.

Right-of-use asset
An asset that represents a lessee’s right to use an underlying asset for the lease term.

Determining the lease liability
In order to determine the lease liability, as with any present value calculation, the lessee requires lease payments information, including:

a. Fixed payments, including in substance fixed payments, less any lease incentives paid or payable to the lessee
b.Variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially measured using the index or rate at the commencement date.
c. The exercise price of an option to purchase the underlying asset if the lessee is reasonably certain to exercise that option
d. Payments for penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.
e. Fees paid by the lessee to the owners of a special-purpose entity for structuring the transaction. However, such fees shall not be included in the fair value of the underlying asset
f. For a lessee only, amounts probable of being owed by the lessee under residual value guarantees

At the lease commencement date, the lessee shall evaluate the terms of the lease as to what payments are due and what the timing of the payments are. Additional information on variable lease payments is covered in our related lease classification article. The purchase option needs to be evaluated based on the nature of the leased asset, and the likelihood that the lessee will exercise the option due to the underlying economics. Payments expected to be paid for early termination should be included and any probable residual value guarantees should also be part of the expected cash outflow.

The payments are then discounted at the implicit rate in the lease or, if that cannot be determined due to the inability of the lessee to determine the fair value of the leased asset at inception, the lessee shall use its incremental borrowing rate.

Generally, the payments used to determine lease classification will be the same as used for the initial measurement. Except, residual value payments are included for the purpose of lease classification but excluded for the lease liability calculation unless they are probable of being paid.

Determining the right-of-use asset
The asset is recorded as the sum of the following amounts:

*The lease liability
*Any payments made to the lessor prior to commencement date (prepaid rent) less any incentives received from the lessor
*Any initial direct costs associated with the lease

Initial direct costs are those incremental costs that a lessee may incur in connection with entering into a lease. Some examples would be: commissions paid to agents, legal fees related to executing the lease, payments paid to tenants to move out, or consideration paid to a third party to guarantee the residual value.

Generally, internal incremental costs such as salaries, advertising, other origination efforts, etc., may not be considered initial direct costs.