ACCA Financial Reporting (F7) Practice Exam

Which of the following are components of lease payments?

1. Lease extension fees and service charges

2. Principal repayment and interest expense

3. Admin fees and insurance premiums

4. Maintenance costs and depreciation

The correct answer is: Principal repayment and interest expense

The correct choice identifies principal repayment and interest expense as components of lease payments. This is essential to understanding how leases are treated in financial reporting. Under IFRS 16, which governs lease accounting, companies must recognize both the right-of-use asset and the lease liability on their balance sheets. The lease liability is essentially comprised of the present value of future lease payments, which can include fixed payments, variable payments that depend on an index or rate, and any amounts expected to be paid under residual value guarantees. When a lease payment is made, it typically consists of two components: the repayment of the principal amount of the lease liability (representing the obligation to pay future amounts) and the interest expense on that liability (the cost of borrowing). This dual nature reflects how leases are similar to financing arrangements and ensures that financial statements accurately convey both the obligation and the cost associated with leasing an asset over time. In contrast, choices involving lease extension fees, service charges, administrative fees, or maintenance costs do not directly represent the core components of lease payments as defined under lease accounting standards. These elements may be payable in relation to a lease but are generally considered as separate costs or operational expenses rather than the lease payments themselves that affect the measurement of the lease liability on the