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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Zenta Co enters a 4-year lease of equipment on 1 January 20X1 with annual payments of $10,000 in arrears. The rate implicit in the lease is not readily determinable, and Zenta's incremental borrowing rate is 8%. At the commencement date, which discount rate should Zenta use to measure the lease liability?

Zenta should use its incremental borrowing rate of 8%. IFRS 16 requires the rate implicit in the lease where it can be readily determined, and otherwise the lessee's incremental borrowing rate, which reflects borrowing over a similar term with similar security.

  1. AThe incremental borrowing rate of 8%Correct
  2. BZenta's weighted average cost of capital
  3. CThe lessor's expected return on the asset's residual value
  4. DThe rate on government bonds with a 4-year maturity

Explanation

IFRS 16 requires the lessee to discount lease payments using the rate implicit in the lease if readily determinable, otherwise the lessee's incremental borrowing rate. Here the implicit rate is unavailable, so 8% applies. WACC and risk-free rates are not permitted bases.

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