Measure the lessee's initial right and obligation

Cedar Trail will pay $25,000 at each year-end for 5 years. The documented annual rate is 8 percent. Present value is $99,817.75092695221. That amount is the opening liability because all five payments remain unpaid at commencement.

Build the liability from dated unpaid cash flows

For each payment, record amount, due date, period number, discount factor, and present value. Sum full-precision present values. If the first payment is made at commencement, it is not an unpaid liability; treat the remaining stream as an annuity due only with a timing convention that makes that fact visible.

Bridge to the ROU asset

Start with the liability, then:

initial ROU asset
= initial lease liability
+ payments made at or before commencement
− incentives received
+ qualifying initial direct costs

The ROU asset is Cedar Trail's contractual right to use the line. It is not the underlying machine and does not inherit the machine's fair value merely because the classification is finance.

Reject costs that would exist without execution

Qualifying initial direct costs are incremental costs that would not have been incurred if the lease had not been obtained. General legal review, internal payroll, and due diligence do not become ROU cost merely because they helped the decision. Preserve excluded amounts as period costs with their own evidence.

The commencement entry is noncash except for paid items

Debit ROU asset and credit lease liability for the recognized amounts; add cash or other accounts only for actual commencement payments, incentives, and qualifying costs. Do not manufacture a cash inflow and outflow for the recognized liability.

Exit check

Reperform the initial measurement in the paired example. Tie every ROU adjustment to the commencement map and explain why the liability and ROU asset are equal, or why they are not.