The director of a company, specializing in the manufacture and marketing of cashmere sweaters, signs a rental contract for a weaving machine for a period of 8 years, with an option to extend for 4 years.

The annual lease payments are USD35,000, payable at the beginning of the period, during the first period and USD30,000 during the optional period.

The company incurred direct costs of USD5,000 to set up the contract and USD2,000 in commissions to the intermediary for the import of the machine.

At the inception of the contract, the company does not expect to lease the asset beyond the initial 8-year period. The implicit interest rate to be considered is 4%. It is expected that the machine will be used regularly throughout the lease period.

Work to be done:

1. Qualify the lease under IFRS 16.
2. Calculate the right of use of an asset to be recorded at the inception of the contract.