Right-of-Use Asset
IntermediateA right-of-use asset is an asset a lessee records on its balance sheet that represents its right to use a leased item, such as a building or vehicle, over the lease term.
Under current lease accounting rules, a company that leases an asset recognises a right-of-use asset alongside a lease liability. The asset reflects the economic benefit of being able to use the leased item, even though the company does not own it.
The right-of-use asset is usually measured at the start of the lease at the amount of the lease liability, adjusted for items such as payments made before the lease began, initial direct costs and any lease incentives received.
For example, a company that records a lease liability of 433,000 for a five-year office lease, and paid 10,000 in legal fees to arrange it, would record a right-of-use asset of about 443,000.
The right-of-use asset is then depreciated, usually on a straight-line basis over the lease term. Under IFRS 16, this depreciation appears separately from interest on the lease liability. Under US GAAP, for operating leases, the two are combined into a single lease expense.
Right-of-use assets can be significant for companies that rely heavily on leasing. They are tested for impairment like other long-term assets.
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