A lessee enters into a 20-year lease of one floor of a building, with an option to extend for a further five years. Lease payments are K100, 000 per year during the initial term and K120, 000 per year during the optional period, all payable at the end of each year. To obtain the lease, the lessee incurred initial direct costs of K35, 000

At the commencement date, the lessee concluded that it is not reasonably certain to exercise the option to extend the lease and, therefore, determined that the lease term is 20 years. The interest rate implicit in the lease is 6% per annum. The present value of the lease payments is K800, 500.

REQUIRED:

Illustrate and explain how the lease will be accounted for at least 2 years in accordance with IFRS 16 Your answer should include computations.