ACCA Financial Reporting (F7) Practice Exam

What is the primary accounting treatment for a lessee under IFRS 16?

1. Recognize a right-of-use asset and a lease liability

2. Only record lease payments as an expense

3. Report leased assets at fair value

4. Classify all leases as operating leases

The correct answer is: Recognize a right-of-use asset and a lease liability

The primary accounting treatment for a lessee under IFRS 16 is to recognize a right-of-use asset and a lease liability. This approach reflects the lessee's control over the leased asset and the obligation to make lease payments. When a lessee enters into a lease agreement, they obtain the right to use an asset for a period of time, and this control must be recognized on the balance sheet as a right-of-use asset. Simultaneously, the obligation to pay for this use manifests as a lease liability. This dual recognition aligns with the principle that leases provide economic benefits over time, and recognizing both the asset and liability gives a clearer and more accurate picture of a company's financial position. This treatment contrasts sharply with options that suggest only expenses being recorded or treating all leases as operating leases. Such approaches do not reflect the asset and liability nature of leases, which IFRS 16 aims to address by increasing transparency in financial reporting through the inclusion of leased assets in financial statements.