How is the right-of-use asset measured at commencement?

• A. The original cost of the asset
• B. Cost (including initial value of lease liability) plus payments made at or before commencement
• C. The fair value of the underlying asset
• D. The annual depreciation charge for the first year

Answer: (B)

At commencement, the right-of-use asset is measured at cost. That cost includes the amount of the lease liability (the present value of future lease payments) plus any payments made at or before the commencement date, and it may also include initial direct costs and other related costs (minus any lease incentives received). The option that states cost including the initial value of the lease liability plus payments made at or before commencement captures this initial recognition correctly. After this point, the asset is depreciated over the lease term (or its useful life), and other adjustments may apply for costs to dismantle or restore, depending on the lease terms. The other choices aren’t correct for this initial measurement: the asset isn’t simply the original cost of an owned asset, nor is it measured at fair value, and depreciation is a post-recognition expense, not the measurement at commencement.