First measuring a right-of-use asset and lease liability

The amounts at which a client first records a lease under IFRS 16, what goes into the right-of-use asset, and how to build and check the opening entry.

By Achekam · 11 October 2026 · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya

A retailer signs a lease for a new store in a shopping centre. Before opening day it pays a deposit and the first month's rent, receives a fit-out contribution from the landlord, pays a broker's commission, and agrees to return the unit to bare walls when it leaves. The lease runs for several years with fixed monthly rentals. By the time the doors open, half a dozen amounts have moved, and the bookkeeper has expensed some, capitalised others and ignored the rest.

IFRS 16 brings all of them together into two opening figures: a right-of-use asset and a lease liability. Getting those figures right on day one determines the depreciation and interest for the whole lease. This article covers what goes into each, how to check terms read from the contract, and the opening entry.

The lease liability: present value of payments not yet paid

IFRS 16 requires a lessee to recognise a lease liability representing its obligation to make lease payments, and a right-of-use asset representing its right to use the underlying leased asset. ACCA explains that the lessee recognises both at the commencement date, with the liability initially measured at the present value of the lease payments not yet paid.

Start with the liability, because the asset is built on it. Three inputs are needed:

• The payments not yet paid at commencement, taken from the lease: the remaining fixed rentals for the term, and any other amounts the standard treats as lease payments. Payments already made at or before commencement are excluded here; they go to the asset instead.
• The lease term, which depends on the contract's period and on any extension or termination options, assessed in the way IFRS 16 requires.
• A discount rate, chosen in the way IFRS 16 requires. Record the rate and where it came from, because a reviewer will check both.

The present value of the payments, discounted at that rate, is the opening liability.

Building up the right-of-use asset

ACCA lists what the right-of-use asset includes:

1. the initial measurement of the lease liability;
2. lease payments made at or before the commencement date, less any lease incentives received;
3. the lessee's initial direct costs; and
4. an estimate of the costs of dismantling and removing the asset or restoring the site.

The asset therefore starts from the liability and is adjusted for what happened before and around commencement. For a straightforward lease with no prepayments, incentives, direct costs or restoration obligation, the asset and the liability start equal. Most real leases are not that simple.

Incentives, initial direct costs and restoration

Each adjustment has its own evidence and its own trap.

• Prepayments. The first month's rent paid before opening is a lease payment made at or before commencement. It goes into the asset, not into rent expense. A refundable deposit is different: it is returned at the end, so look at the contract to decide whether it is a lease payment at all.
• Lease incentives. The landlord's fit-out contribution reduces the asset. It should not be credited to income or offset against the fit-out cost of the shop.
• Initial direct costs. The broker's commission on securing the lease is a cost the client would not have incurred without the lease, so it is added to the asset. General costs of the property search, or the internal time of the client's staff, are not.
• Restoration. The obligation to return the unit to bare walls is an estimate of a future cost. It is added to the asset and recognised as a provision at the same time. Base it on a contractor's estimate where possible.

Confirming AI-read lease terms against the contract

Achekam lets staff keep a client's lease register under IFRS 16 or IFRS for SMEs Section 20. The register can read a lease from the contract and produce an AI draft of its terms, but that draft is not used until a person confirms it, and every number the AI reads must appear in the contract text.

The second rule is a useful safeguard, but it does not make a figure the right one to use. An AI reading can pick up a number that does appear in the contract but refers to something else: the rental for an optional renewal period, an escalation that applies only after a review, or the deposit mistaken for a payment. Before confirming, check against the signed lease and any addenda:

• the commencement date and the term, including options;
• each rental amount and the dates it changes;
• incentives and who pays for fit-out;
• the restoration clause.

Maintaining the register through the life of the lease is covered in the IFRS 16 lease register.

The opening entry

A worked example in words, for the retailer. On commencement the preparer records the right-of-use asset and the lease liability at the present value of the unpaid rentals. The first month's rent paid before opening is moved from rent expense into the asset. The landlord's fit-out contribution is moved from income into a reduction of the asset. The broker's commission is moved from sundry expenses into the asset. The restoration estimate is added to the asset with a matching provision. The refundable deposit is kept as a receivable.

Where the client's books have not recorded the lease this way, the correction is posted in Achekam's Studio as a year-end adjusting entry. An entry that turns out wrong is reversed with a record of who did it and why, never deleted. Depreciation of the asset then follows: Achekam does not calculate depreciation; it presents the depreciation in the trial balance and flags when the charge does not agree with the movement in accumulated depreciation, so the depreciation on the new right-of-use asset must be worked out and recorded. The period over which to depreciate it is covered in the right-of-use depreciation period.

ACCA's technical article on IFRS 16 explains how to identify a lease and how a lessee recognises a right-of-use asset and lease liability, with worked examples. For every lease that started this year, list the amounts that moved before opening day, and check where each one ended up.

General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.